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Morningstar: China is a critical market for U.S. oil

Short-term, the threat of tariffs has "put a nail in the coffin" for China's appetite for U.S. crude oil, a researcher wrote.

By
Daniel J. Graeber
Chinese appetite for U.S. crude oil exports is diminishing as trade tensions between the world's leading economies intensifies. File Photo by tcly/Shutterstock
Chinese appetite for U.S. crude oil exports is diminishing as trade tensions between the world's leading economies intensifies. File Photo by tcly/Shutterstock

Aug. 13 (UPI) -- After soaring last year, U.S. crude oil exports to China have started to slow down because of trade concerns and price differentials, Morningstar found.

Total U.S. crude oil exports to China averaged 22,000 barrels per day in 2016, the first year for U.S. oil shipments following the lifting of a 40-year-old ban by then-President Barack Obama. Last year, U.S. oil exports increased to 224,000 barrels per day and have averaged 337,000 barrels per day during the first six months of the year.

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Last year, a report from Morningstar found China accounts for 20 percent of total U.S. crude oil exports and maintained that appetite for the first half of 2018. That trend, however, is starting to move in reverse.

Sandy Fielden, the director for oil and products research at Morningstar, reported that Chinese appetite is fading in part because independent refiners, known as teapots, are facing higher sales taxes on fuels because of new government regulations.

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Meanwhile, the difference, or spread, between Brent, the global benchmark for the price of oil, and West Texas Intermediate, the U.S. benchmark, is shrinking, meaning WTI is losing some of its competitive edge in the global market.

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"Added to these commercial factors, the more recent threat of crude tariffs appears to have put a nail in the coffin for Chinese imports of U.S. crude," Fielden wrote in the emailed report.

China held off on a direct trade blow to U.S. oil and liquefied natural gas in the latest volley of tariffs. Instead, China focused on refined products, a minor component of U.S. exports, and natural gas liquids like propane, which represented about 10 percent of U.S. product exports last year.

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Nevertheless, Fielden wrote that even the threat of tariffs has made Chinese buyers nervous about getting stuck with a reliance on U.S. oil. Last year's surge in Chinese demand for U.S. oil, meanwhile, was fueled by voluntary restrictions from Saudi Arabia and Russia, among the largest suppliers to the Chinese market.

With trade tensions high, Fielden wrote that U.S. crude oil producers will need to look to other Asian economies like India to help make up for the shortage in Chinese demand.

"Assuming their governments come to an agreement on trade differences that end the tariff war, U.S. crude producers need to return to the Chinese market sooner rather than later," he wrote. "That's because China has become the world's largest net importer of crude -- overtaking the U.S. in 2017 -- and as such must be considered a critical market for growing U.S. production."

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