Relations between the United States and China may be at an all-time low, but the trading of energy commodities between the two powers remains active—at least for crude oil.
China needs continued access to the United States as an export market for its manufacturing. But to ensure this economic lifeline remains open, Beijing must make good on its pledge under the phase one trade deal signed with President Trump in January.
America’s oil and gas sector may have suffered under many of President Donald Trump’s harsh trade policies, particularly the trade war that resulted in tariffs on Chinese imports of crude oil and liquefied natural gas (LNG). But China’s recent increase in its appetite for U.S. energy in the run-up to the November elections is a sign that the Trump administration’s pressure on Beijing is paying dividends.
The easiest way for China to reduce its trade imbalance with the United States and get near its phase one energy target is to buy large volumes of U.S. crude, which increase the dollar value of Chinese imports in ways that other U.S. energy products cannot.
While importing U.S. crude often doesn’t make commercial sense for China’s refiners, Beijing has directed them to continue buying as the election approaches—a sign that China knows that the trade issue with Trump will only intensify if the president wins a second term.
To be sure, China won’t hit its phase one energy targets, which call for buying about $25 billion worth of energy products from the United States this year. That was always an overly ambitious target.
But the recent uptick in Beijing’s orders for American oil has been astounding. For U.S. producers dealing with weak demand due to the Covid-19 pandemic, China is a critical export outlet, helping to support oil prices on the Gulf of Mexico Coast.
According to Chinese customs data, China’s imports of US crude oil spiked to a record high of 867,000 barrels a day in July, up from 143,000 barrels a day in June. U.S. crude started arriving in May after Chinese buyers received waivers from Beijing of the 5 percent tariff, and oil prices plunged—recall that U.S. benchmark West Texas Intermediate (WTI) dropped into negative territory in late April.
China’s imports of U.S. crude are expected reach a new high of about 900,000 barrels a day this month, based on ship tracking data. This could prove to be the peak, although Beijing will keep encouraging both state-owned and private refiners to continue buying U.S. oil regardless of market circumstances to stay on the Trump administration’s good side.
While importing American-produced oil may not be the cheapest option available to China’s refiners, state-owned firms don’t have the luxury of ignoring Beijing’s directive.
While China’s state refineries have limited ability to process U.S. crude given plant configurations, they can also store it or resell it to smaller, private Chinese refiners or other Asia-Pacific buyers. That means trade between Beijing and Washington should remain relatively robust, even if it isn’t breaking records every month.
Ship tracking data from Kpler suggests Chinese imports of US crude will fall from 905,000 b/d this month to 507,000 barrels a day in October, which is still a respectable figure considering the trade had dried up to nothing earlier this year amid trade war tensions. And China has plenty of other options to import crude from these days since the world is awash in oil due to Covid-19 demand destruction.
Indeed, China is the most coveted oil market in the world. It is ahead of the rest of the world in recovering from Covid, and some experts believe overall Chinese oil demand should reach pre-virus levels by the end of the year. By contrast, global oil demand is not expected to fully recover before the end of 2021, according to the International Energy Agency’s latest forecast.
The same bullish story cannot be said for U.S. shipments of LNG. Chinese imports of U.S. LNG remain dormant for several reasons. One is weak coronavirus-related domestic demand and ample supply, leaving Chinese LNG importers with little room or appetite for large spot shipments.
Another reason is near-record low LNG prices, making it harder to hit the dollar target under the phase one trade deal. Perhaps the most critical reason is Chinese buyers’ lack of interest in signing long-term supply contracts with U.S. developer, unless forced to by the government—and Beijing has remained silent here.
According to Chinese customs data, China’s LNG purchases are much lower than Washington was hoping, at only 900,000 tons over the first six months of the year, or 2.4 percent of China’s total. State-run PetroChina is the only company with a term deal, signing a 25-year, 1.2 million ton per year contract with Cheniere before the trade war erupted in July 2018.
A few importers, both state-owned and privately run, are now trying to line up term deals, but the United States does not figure into their plans due to the fractious bilateral relationship.
Whereas the total value of China’s oil imports from the United States for the first seven months of 2020 was $1.3 billion, the value of U.S. LNG imports for the same period was less than $300 million. It is difficult for China to post headline-catching dollar sums for U.S. LNG imports due to low commodity prices.
That makes the outlook for LNG exporters more challenging. But for now, beleaguered oil producers should bask in the swell of Chinese buying—while it lasts.