Russell: China's Falling US Crude Imports May Have More To Do With Money



Russell: China's Falling US Crude Imports May Have More To Do With Money
One of the side effects of President Donald Trump's escalating trade dispute with China is that US exports of crude oil to the world's biggest importer are now viewed through the prism of politics.

Reuters

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LAUNCESTON, Australia, Aug 27 (Reuters) - One of the side effects of President Donald Trump's escalating trade dispute with China is that U.S. exports of crude oil to the world's biggest importer are now viewed through the prism of politics.

However, this ignores that buyers and sellers of crude are generally more motivated by profit margins and getting the right grades of oil to maximise the productivity of their plants.

While it's true they can't disregard politics, and this is especially the case for the state-controlled Chinese majors, it's worth looking at the economics of the U.S.-China crude trade as well.

U.S. crude exports to China appear set to slow dramatically in September, with vessel-tracking data compiled by Thomson Reuters Oil Research and Forecasts showing about 6.12 million barrels, or about 204,000 barrels per day (bpd), scheduled for arrival.

This would be down from around 363,000 bpd in August, and would also be the weakest month since March this year.

The slowdown in China's imports of U.S. crude has coincided with the imposition of tit-for-tat trade tariffs and speculation that Beijing would add crude to its list of U.S. products to be hit with import taxes.

That hasn't happened yet, although it would have been understandable for Chinese refiners to be wary of buying from the United States in recent weeks.

However, the pricing of the various grades of crude oil also offers an explanation as to why China stocked up on U.S. crude in August, and appears to have shied away in September, and probably October as well.

Arbitrage Trades

Chinese traders would have been keen to buy West Texas Intermediate (WTI) types of U.S. crude for August delivery, given these cargoes would have been arranged in late May and early June.

The discount of front-month WTI crude oil futures to Brent futures widened to $11.39 a barrel on June 6, and traded close to level for around a three-week period from late May to mid-June.

This means that Chinese refiners could buy WTI at a substantial discount to Brent in the paper market, which would encourage them to take physical cargoes from the U.S. Gulf.

In the physical market the difference between oil linked to WTI and oil linked to Brent wasn't quite as stark, but was nonetheless in favour of the U.S. grades.

Nigerian Bonny Light , a crude oil similar to, and priced against Brent, was trading at $81.17 a barrel on May 22.


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