US-China Deal: What Will It Mean for Tanker Shipping?

Under the ‘phase one’ trade deal signed last week, China has pledged to increase imports of American goods, targeting to bolster its energy imports by USD 52.4 billion above 2017 levels over the next two years.

The deal has been welcomed across the supply chain as a positive step to ending trade war and further trade tensions among global superpowers.

According to BIMCO’s Chief Shipping Analyst Peter Sand, the deal will deliver both trade creation and trade diversion.

Speaking on CNBC, Sand said that more than half of the said amount is expected to come in the form of crude oil.

China is the world’s largest importer of crude oil. In 2019, it imported well over 10 million barrels per day (mb/d), the majority of those imports being seaborne, data from Poten and Partners shows.

As a result, any changes in those imports, in volume or in origin could have significant implications for the tanker market.

Before any prediction can be made, it remains to be seen how China will implement its commitment and whether it would switch to US crude supply.

“If China decided to divert its trade from West Africa and Brazil to the U.S. that would deliver longer hauls for the oil tankers and it would be positive for the market. Naturally, if the country completely shies away from buying in Norway, that would decrease the trading distances, which matters to shipping,” Sand explained.

For 2020, the IEA expects that Chinese oil demand will grow by about 400 Kb/d, from 13.6 mb/d to 14.0 mb/d.

If the Phase 1 agreement is implemented, and U.S. crude is competitively priced, there is room for significant additional volumes of U.S. crude oil to find its way to China. It would help if China removed the 5% tariff it currently levies on U.S. crude oil imports, Poten said in its tanker report.

A research report from Goldman Sachs, discussing the ins and outs of the trade deal, suggests that China could import an additional 500 kb/d in U.S. crude in 2020 and an additional 800 kb/d in 2021 (both relative to 2017).

Based on these numbers, China would need to reduce its purchases from other crude oil suppliers in 2020 to meet its target.

“If they reduce purchases from the Middle East, ton mile demand will increase, but if light sweet crude oil from the U.S. replaces similar grades from Europe or West Africa, the impact will be more muted. For 2021, assuming China’s oil demand will grow by at least 300 Kb/d, no barrels from other suppliers will need to be replaced,” Poten explained.

However, China may not need an additional 300 Kb/d of light sweet crude and imports of lighter grades from West Africa and the Middle East may be reduced. This shift will likely have a modestly positive impact on demand for VLCCs, the vessels of choice to make these moves.

U.S. crude oil production reached 12.3 Mb/d in 2019 (EIA). Production (and by extension exports) is projected to increase by 1 Mb/d in 2020 and another 700 Kb/d in 2021, with further growth expected in subsequent years.

So, the U.S. will have ample crude oil to satisfy additional Chinese demand.

According to Ann-Louise Hittle, vice president, macro oils at Wood Mackenzie, the trade deal is beneficial to the broader global economy but will have a limited impact on the global oil market and the Asian regional refining market.

“Larger purchases of US crude oil exports will be the primary method for China to comply with this agreement, but a USD 52.4 billion increase in energy imports from the US over two years is going to be challenging, especially as liquefied natural gas and liquefied petroleum gas will play a minor role in plugging the gap.”

In 2017, China imported about 300,000 barrels per day (b/d) of US crude oil, valued at close to USD 5.8 billion, she said.

“In a free trade market, our proprietary Refinery Supply Model suggests that an optimal volume of US crude imports for China is only about 400,000 b/d in 2021. Despite the continued growth of US oil exports, China’s appetite for US tight oil is limited given that its deep conversion refineries are designed to process medium/heavy crudes from the Middle East and Latin America.

“With the new trade deal, preliminary estimates suggest that China would need to import an average of about 1.1 million b/d of US crude over the next two years. China would be able to absorb these US volumes, however, they would make up only 11% of total crude imports.”

US crude prices are unlikely to be affected by the deal, Hittle believes, because they are already discounted to reflect the cost of transport to other Asian nations.

“The deal does pose a challenge for OPEC producers such as Saudi Arabia who aim to maintain market share in growing Asia oil markets – especially China,” she added.

“Assuming China is committed to the deal, discounting OPEC barrels to maintain market share will be ineffective. Instead, we would expect to see a shuffling of global crude trade, with the crude shipping sector benefiting from the growth in long-haul trade.

“OPEC will need to send volumes to other nations in Asia and to Europe, backfilling those US barrels that are now heading to China.”

China imposes a 5% tariff on US crude imports and has not indicated whether waivers or exemptions to the tariff will be offered. If it remains in place, the tariff could hit refining margins.

“This would discourage the country’s independent refiners from processing large volumes of US crude,”Alan Gelder, vice president, refining at WoodMac, said.

“Chinese NOCs with large integrated refinery and petrochemical sites are most likely to process the extra US volumes. These sites have more flexibility to manage shifts in product yields resulting from the increase in lighter crudes and they have the strongest competitive position, so best able to absorb the cost impact.”