China’s imposition of tariffs on U.S. crude oil signals its willingness to suffer more pain in the trade war than analysts may have expected, according to a Bank of America analyst who spoke to CNBC.
“They’re hurting themselves on the domestic front by making it more difficult for domestic refineries to make money. They’re hurting themselves on the international front by making their refineries less competitive,” said BofA’s head of commodities and derivatives research, Francisco Blanch.
Blanch’s remarks refer to wide expectations for greater demand for light sweet crude, which is the primary sort of crude the United States produces and exports. These expectations are related to the new sulphur emissions rules the International maritime Organization will put into effect from next January.
According to Blanch, the new IMO rules will “create a pretty big premium on light sweet grades which are mostly coming out of the U.S. these days.”
A quick check with actual figures, however, reveals that the United States is not even in the top five suppliers to China. As of end-2018, Russia was the largest one, followed by Saudi Arabia—which this year has overtaken Russia as number one—Angola, Iraq, and Oman.
The situation has changed this year, and not for the better for U.S. producers: Chinese buyers have been keeping their intake of U.S. oil to a minimum as the trade war continues.
Indeed, Blanch acknowledges that China is not a huge buyer of U.S. crude right now, with the average for the first half of the year at 120,000 bpd, most of which shipped during the first quarter, before the trade talks situation deteriorated.
He offered a parallel with soy beans: because of the tariffs, China switched from U.S. to Brazilian—and also Russian—soy beans, with the Brazilian commodity more expensive than the U.S. equivalent.
- “We are skeptical that this is going to get resolved,” the analyst said. “And part of it is that China’s pain threshold is high.”