Chinese Tariffs And U.S. Energy Flows

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Includes: BGR, BNO, CHN, CN, CRAK, CXSE, DBE, DBO, DBRT, DDG, DIG, DNO, DTO, DUG, DWT, ERGF, ERX, ERY, ERYY, FCA, FENY, FIF, FLCH, FTXN, FXI, FXN, FXP, GCH, GXC, IYE, JFC, JHME, JJE, KGRN, MCHI, NANR, OIH, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, ONG, PGJ, PXJ, RJN, RYE, SCO, SZO, TDF, UBN, UBRT, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, VDE, WCHN, WTID, WTIU, XLE, XPP, YANG, YAO, YINN, YXI
by: Matt Smith

Tensions were already running high betwixt the U.S. and China before trade threats were ratcheted up once more this week. As we know all too well, all paths lead back to energy: hence, commodity flows will likely feel the brunt of the current collywobbles.

China is now the leading destination for U.S. crude. This mantle used to belong to Canada, but given the rising trend in the U.S. Gulf of reverse lightering (where smaller vessels transfer crude onto a VLCC), it has become much more economically viable to transport large volumes to Asia. The widening discounts for U.S. crude grades versus Brent are only further encouraging this trade.

Light sweet Midland WTI is the leading grade to be delivered to China, rising to 230,000 bpd last month, and deliveries are at an even quicker pace so far in June. WTI, DSW and Bakken are also leading grades, with 13 grades in all finding their way to Chinese shores since the lifting of the U.S. export ban in late 2015.

Chinese imports of US crude grades ClipperData

While Mexico and South Korea are leading destinations for both U.S. LNG and LPG, China is not far behind. It accounts for about 18 percent of U.S. LNG exports so far this year, up from 11 percent last year, with volumes (in theory) only set to rise going forward as U.S. LNG export capacity triples by 2020 and Chinese demand marches higher (and higher).

As for LPG deliveries, China's share has dropped in 2018 but still accounts for 16 percent of U.S. LPG exports, down from 20 percent last year.

It is interesting to note how both commodities follow a seasonal trend, with China pulling in relatively more U.S. LNG and LPG in the winter to meet heating needs:

LNG LPG to China ClipperData

While exports of US middle distillates are sporadic to China, light distillates are a regular fixture, with average deliveries of 20,000 bpd. U.S. blending components have been delivered to 16 different Chinese destinations since the start of last year, with the port of Zhenhai discharging the most.

As the trade war continues to escalate, it seems energy flows cannot avoid being swept up in the rising animosity.

US light distillates to China ClipperData