Falling Chinese imports of US crude more to do with cash than tariffs
Buyers and sellers of crude, especially state-controlled Chinese majors, are generally more motivated by profit margins
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.
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 US-China crude trade as well.
US 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 US crude has coincided with the imposition of tit-for-tat trade tariffs and speculation that Beijing would add crude to its list of US 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 US crude in August, and appears to have shied away in September and probably October as well.
Chinese traders would have been keen to buy West Texas Intermediate (WTI) types of US 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 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 US 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 US grades.
Nigerian Bonny Light, a crude oil similar to, and priced against Brent, was trading at $81.17 a barrel on May 22.
At the same time, WTI delivered at the Magellan East Houston terminal, as assessed by Argus Media, was at $76.40, a discount of $4.77 a barrel.
This level of discount is enough to offset the slightly higher freight cost of shipping to China from the US Gulf as opposed to the west coast of Africa.
However, by the time September cargoes for China would have been arranged, the numbers had moved in the other direction, with Bonny Light trading at $73.52 a barrel on June 25, putting it at a discount of $1.47 to WTI Houston.
This would have made buying West African light crudes more attractive than cargoes from the United States.
While the Chinese refiners may have been under some political pressure to cut back on buying US crude, it was probably something they didn't feel the need to push back on, given the profits weren't working anyway.
The current pricing isn't particularly supportive of Chinese buying of US cargoes, with Bonny Light at a slight $1.11 a barrel premium over WTI Houston.
For refiners prepared to offset physical trades in the paper market, the discount of WTI futures to Brent contracts was at $7.05 a barrel on August 24, widening from $4.82 at the end of July.
However, putting the paper and physical pricing together suggests that US crude is currently not a compelling purchase for Chinese refiners, compared to similar grades from other producers, such as those in West Africa.
While the trade spat between Washington and Beijing could worsen to the point where US crude exports to China are rendered completely uncompetitive, in the meantime it probably pays to look at the underlying pricing to help judge the likelihood of whether exports will rise or fall.
Updated: August 27, 2018 07:31 PM