Trade War: U.S. Oil Misses Chinese Demand

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Includes: BNO, CHN, CN, CXSE, DBO, DTO, FCA, FLCH, FXP, GXC, KGRN, OIL, OILK, OILX, OLEM, OLO, PGJ, SCO, SZO, TDF, UCO, USL, USO, WCHN, XPP, YANG, YAO, YINN, YXI
by: CME Group
Summary

The latest monthly report on Chinese trade data contained yet another reminder of the serious impact that the U.S.-China trade dispute has had on U.S. crude oil exports.

China did not import a single barrel of U.S. crude oil in December. In fact, the world's second largest consumer has barely imported any U.S. crude since July 2018.

In the year before the trade dispute emerged, China had accounted for, on average, around 20 percent of all U.S. exports, equivalent to over 11 million barrels per month.

By Owain Johnson

At A Glance

  • Energy markets are closely watching trade negotiations between the United States and China.
  • U.S. exports continued to rise in 2018, even as China stopped buying U.S. crude.

The latest monthly report on Chinese trade data contained yet another reminder of the serious impact that the U.S.-China trade dispute has had on U.S. crude oil exports.

China did not import a single barrel of U.S. crude oil in December. In fact, the world's second largest consumer has barely imported any U.S. crude since July 2018.

In the year before the trade dispute emerged, China had accounted for, on average, around 20 percent of all U.S. exports, equivalent to over 11 million barrels per month.

The shale oil revolution and the lifting of the U.S. crude oil export ban at the end of 2015 has seen the United States consistently set export records. At the same time, Asian demand has been growing, providing a natural outlet for the new U.S. supplies.

China has been the main driver of Asian growth. China imported a record 10.4 million barrels per day of crude oil in November and has started this year strongly. Even though there are some doubts about the pace of Chinese economic growth in 2019, China should be a key import market for U.S. crude oil.

Replacing China

The good news for U.S. exporters is that the absence of China does not seem to have dented demand for U.S. crude oil. Exports continued to rise in late 2018 and October saw a new record as 72 million barrels were shipped overseas.

South Korea filled much of the gap left by the absence of Chinese demand, dramatically stepping up its imports of U.S. crude oil.

Crude oil will always find a buyer at the right price level so the growth in U.S. exports is unlikely to be derailed by the temporary absence of Chinese demand.

Lose-Lose Scenario

But in the longer term, the absence of U.S. oil from China weakens both sides.

For U.S. exporters, Asia represents their largest opportunity. Economic growth is faster in Asia than in other potential export markets such as Europe, Canada and Latin America. As a result, Asia accounted for around half of all U.S. exports in November, even despite the absence of China.

China is by far the biggest economy within Asia and has some of the fastest demand growth rates for energy of any country in the world.

U.S. crude oil will always find a home. But this may be at a lower realized price than if Chinese refiners were also competing actively to secure U.S. barrels.

There are also consequences for Chinese buyers, who have had to scramble to replace U.S. exports. The dispute with the U.S. comes at a time when the OPEC nations and their ally Russia are reducing output to support prices, while Venezuelan supplies look increasingly unreliable.

In a tighter environment for oil supply, China should by rights be looking to the tremendous growth in U.S. output to diversify its supplies and to help meet its growing energy needs.

Energy Bridges The Gap

The energy markets are closely watching the progress of trade negotiations between the two sides and any signals from the talks or any diplomatic developments are immediately impacting oil prices. Assuming that there is some resolution between the two sides, the longer-term prospects for the relationship are rosy.

China needs ever more energy imports to satisfy its economic development needs. At the same time, the U.S. is setting new records for energy exports on an almost monthly basis, not only for crude oil but also for liquified natural gas (LNG).

Growth in U.S. supplies of energy to China would be the ideal way to help bridge the giant trade deficit between China and the U.S., which should defuse some of the current diplomatic tensions.

It is hard to imagine that there will not be a resumption of normal trading patterns in the medium term: one of the world's major producers needs one of the leading consumers and vice versa.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.