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Impact Of U.S.-China Trade Dispute On Oil Is Starting To Fade

by: Faisal Faeq
Summary

It was expected that China would resume US oil imports, but the overall outlook for trade flow between the two in 2019 remains gloomy.

Despite Chinese imports from Iran and the US dropping drastically, the shortfall has been made up by increased imports from Saudi Arabia and Russia.

Even though Saudi Arabia has no crude oil pipeline into Chinese territory, Saudi Aramco’s marketing strategy was able to return it to the top of the pile in November.

US sanction waivers on Iranian oil exports only succeeded in affecting market sentiment, rather than market fundamentals.

The IEA should reconsider its earlier downward outlook for oil demand growth that has introduced a bearish sentiment after Brent prices rose to $86 in early October.

Photo from AsiaNews.it

Following the deal struck between US President Donald Trump and his Chinese counterpart, Xi Jinping, at the G20 summit at the start of this month, China is reportedly close to resuming imports of US crude oil.

Before the two countries entered a trade dispute, China was the world’s major importer of US shale oil, and commentators suggest that the Xi-Trump deal was, in part, an attempt by China to avoid tariffs being imposed on commodities including crude oil imports.

Following the G20 summit, tensions were supposed to have eased between the world’s two largest economies, with a 90-day truce reportedly agreed by the two leaders. It was expected that, during that window, China would resume US oil imports, but the overall outlook for trade flow between the two in 2019 remains gloomy, and it is unclear what will happen when the truce ends. China has already moved to substitute its US imports with increased imports from Saudi Arabia and Russia.

According to Chinese customs data, China’s crude oil imports hit a record 9.65 million barrels a day in October. Most of this high-demand growth was fulfilled by the crude-oil spot market, particularly Russia’s Siberia-Pacific Ocean (ESPO) pipeline.

In November, however, Saudi Arabia was China’s top crude oil supplier with 1.596 million barrels per day (bpd). Russia came in second with 1.593 million bpd. Saudi Arabia was the No. 1 supplier to China for a decade up to 2016. And even though the Kingdom has no crude-oil pipeline into Chinese territory, Saudi Aramco’s marketing strategy was able to return it to the top of the pile in November.

Saudi Aramco’s existing long-term crude supply agreements with Chinese customers are expected to raise its exports to China in 2019 to nearly 1.7 million bpd. Russian oil exports to China, too, are expected to increase next year, with 600,000 bpd via the Skovorodino-Mohe-Daqing pipeline, a spur of the ESPO pipeline, and another 200,000 bpd via Kazakhstan.

The rest is expected to come from the Pacific port of Kozmino, the ESPO endpoint. During its trade war with the US, China has cut its crude oil imports from the US to zero.

It has also cut oil imports from Iran to an eight-year low, a move it began even before the trade war — cutting imports below the level prior to the sanctions on Iranian oil, a point to which it has not returned since, despite the drop in oil prices in the final quarter of 2018. Despite Chinese imports from Iran and the US dropping drastically, the shortfall has been made up by increased imports from Saudi Arabia and Russia.

This suggests that the US sanction waivers only succeeded in affecting market sentiment, rather than market fundamentals. However, the trade dispute has certainly affected the US and Chinese equities markets. Both are under-performing, despite the US equity markets’ resilience earlier in 2018.

The latest turmoil has proven too much. So far, the International Energy Agency "IEA" has exacerbated the situation involving the escalation in US-China trade tensions to adversely impact the global economy in order to lower the growing demand for oil — a move that is hard to explain or justify, as new refineries and increased utilization rates will stimulate additional demand.

Yet the economic impact of the US-China trade argument is not market-reflective. Surprisingly, some economists are suggesting that the trade dispute could spark a global recession, sending incremental oil demand lower. This has caused growing concern about supply and poor economic growth that has pushed oil prices lower, based purely on sentiment.

The IEA should reconsider its earlier downward outlook for oil demand that has introduced a bearish sentiment over the past few months after Brent prices rose to $86 in early October.

Previously Published by Arab News

References:

Saudi Arabia To Raise Oil Shipments To China | OilPrice.com

Saudi Arabia Becomes China's Largest Oil Supplier in November

Saudi Arabia is China's top oil exporter in November: report

Saudi Aramco aims to return as China's top oil supplier with new contracts in 2019

IEA forecasts lower oil demand as China-U.S. trade clash persists Oil

Market Report: Twin Peaks OMR - 1018

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.