- China’s plan to put tariffs on U.S. crude oil shows it is willing to take more economic pain in the trade war than some in the markets have expected.
- China’s proposed tax on oil could hurt margins at its own refineries.
- The U.S. exports light sweet crude, a grade of oil that is expected to be in greater demand from refiners making lower sulfur shipping fuel, which will be mandated starting early next year for the world’s shipping industry.
According to analyst Merrill Lynch, an analyst for the Bank of America, to make a show of how willing China is to take bigger economic pains in the trade war with the US, tariffs on the sale of US crude oil is anticipated, reports CNBC.
Tight situation on domestic fronts and refineries
According to the head of commodities and derivatives research at Bank of America, Francisco Blanch, China may be on their way to making their own situation difficult on domestic fronts and refineries.
They have hurt their position on the international front by lessening of the competition.
Big premium on crude oil
Blanch said changes in shipping fuel requirements that take place early next year could “create a pretty big premium on light sweet grades which are mostly coming out of the U.S. these days.”
The world’s refineries are expected to seek more of the lighter crude to make the low sulfur fuel, required globally by the International Maritime Organization.
Soy beans to Brazilian beans
“China will have to bid up international barrels,” said Blanch, noting it would be similar to what happened in the soy bean market.
China stopped buying U.S. soy beans but has been paying more to buy Brazilian beans.
Effects of IMO2020 implementation
“It certainly is not very rational. it’s hard to quantify because we haven’t seen the full extent of the IMO 2020 implementation,” he said.
The rule affects about 3 million barrels a day of heavy bunker fuel, which ships must stop using or use with scrubbers.
Big buyer of U.S. crude
In announcing new tariffs on $75 billion in U.S. goods Friday, China said it would put a 5% tax on oil starting Sept. 1.
The U.S. now exports more than 2.5 million barrels a day of oil, while it produces over 12 million barrels a day.
Blanch said China was not a big buyer of U.S. crude, and it has already cut imports from the U.S. It imported 120,000 barrels a day for the first half of the year, with most of it coming in the first quarter, he said.
Increase in Saudi crude import
By contrast, China’s imports of Saudi Arabian crude are rising and now total about 1.9 million barrels a day. But Saudi Arabia exports a heavy grade of crude oil.
Blanch estimates that the margin hit per barrel for China from the tariffs would be about $3, if China were importing and refining U.S. crude. The average refining margins around the world are $5 to $7, he said.
“We are skeptical that this is going to get resolved,” Blanch said, “and part of it is that China’s pain threshold is high.”
Did you subscribe to our daily newsletter?
It’s Free! Click here to Subscribe!
Source: CNBC
