Chinese Refiner Halts US Oil Purchases, May Use Iran Oil Instead

With the US and China contemplating their next moves in what is now officially a trade war, a parallel narrative is developing in the world of energy where Asian oil refiners are racing to secure crude supplies in anticipation of an escalating trade war between the US and China, even as Trump demands all US allies cut Iran oil exports to zero by November 4 following sanctions aimed at shutting the country out of oil markets.

Concerned that the situation will deteriorate before it gets better, Asian refiners are moving swiftly to secure supplies with South Korea leading the way. Under pressure from Washington, Seoul has already halted all orders of Iranian oil, according to sources, even as it braces from spillover effects from the U.S.-China tit-for-tat on trade.

“As South Korea’s economy heavily relies on trade, it won’t be good for South Korea if the global economic slowdown happens because of a trade dispute between U.S and China,” said Lee Dal-seok, senior researcher at the Korea Energy Economic Institute (KEEI).

Meanwhile, Chinese state media has unleashed a full-on propaganda blitzkrieg, slamming Trump’s government as a “gang of hoodlums”, with officials vowing retaliation, while the chairman of Sinochem just become China’s official leader of the anti-Trump resistance, quoting Michelle Obama’s famous slogan “when they go low, we go high.” Standing in the line of fire are U.S. crude supplies to China, which have surged from virtually zero before 2017 to 400,000 barrels per day (bpd) in July.

Representing a modest 5% of China’s overall crude imports, these supplies are worth $1 billion a month at current prices – a figure that seems certain to fall should a duty be implemented. While U.S. crude oil is not on the list of 545 products the Chinese government has said it would immediately retaliate with in response to American duties, China has threatened a 25% duty on imports of U.S. crude which is listed as a U.S. product that will receive an import tariff at an unspecified later date.

And amid an escalating tit-for-tat war between Trump and Xi in which neither leader is even remotely close to crying uncle, industry participants expect the tariff to be levied, a move which would make future purchases of US oil uneconomical for Chinese importers.

“The Chinese have to do the tit-for-tat, they have to retaliate,” said John Driscoll, director of consultancy JTD Energy, adding that cutting U.S. crude imports was a means “of retaliating (against) the U.S. in a very substantial way”.

In an alarming sign for Washington, and a welcome development for Iran, some locals have decided not to see which way the dice may fall.

According to Japan Times, in a harbinger of what’s to come, an executive from China’s Dongming Petrochemical Group, an independent refiner from Shandong province, said his refinery had already cancelled U.S. crude orders.

“We expect the Chinese government to impose tariffs on (U.S.) crude,” the unnamed executive said. “We will switch to either Middle East or West African supplies,” he said.

Driscoll said China may even replace American oil with crude from Iran. “They (Chinese importers) are not going to be intimidated, or swayed by U.S. sanctions.”

Oil consultancy FGE agrees, noting that China is unlikely to heed President Trump’s warning to stop buying oil from Iran. While as much as 2.3 million barrels a day of crude from the Persian Gulf state at risk per Trump’s sanctions, the White House has yet to get responses from China, while India or Turkey have already hinted they would defy Trump and keep importing Iranian oil. Together three three nations make up about 60 percent of the Persian Gulf state’s exports.

To be sure, for some turmoil in the oil market present opportunity: “If China retaliates with tariffs on U.S. crude, that could improve South Korea’s terms of buying U.S. crude…because the U.S. would need a market to sell to,” said the KEEI’s Lee, while JTD Energy’s Driscoll said U.S. oil sellers were “already discounting” their crude.

While next steps remain unclear, the potential outcome for the US isn’t: should China fully pivot away from US exports and replace them with Iranian product, the US trade deficit will resume rising, further adding to the pressure of what is Trump’s biggest economic hurdle: the double US deficits.

The flipside is that since less Iranian oil exports will go unused, it may provide a solace to the US consumer facing the highest gas prices in four years. However, if the ongoing pipeline bottleneck in the Permian is not resolved soon, said  solace will prove to be short-lived.