Chinese refiners to gain from decision to drop tariffs on US crude

Beijing decided to exempt $8bn worth of crude imports from the US, which comes as a relief to Sinopec, Asia's largest refiner

The US is the single largest source of new oil supplies outside Opec for China. AFP

China's decision to remove crude oil from its latest tariff list in an escalating trade war with the United States was a relief to state oil firms prompted by a strong lobbying effort by main importer the Sinopec Group, Beijing-based oil sources said.

Dropping crude oil from the final tariff list on $16 billion in US goods announced late on Wednesday underscores the growing importance of the United States as a key global producer and critical alternative supply source for top importer China, which is seeking to diversify its oil purchases.

Removing crude imports, worth roughly $8 billion annually based on Sinopec's earlier forecast of 300,000 barrels per day (bpd) for 2018, also gives Beijing room to manoeuvre in future negotiations with Washington, especially as it may soon lose some Iranian oil shipments due to reimposed US sanctions.

"Sinopec did a lot of lobbying work with the government," said one person with direct knowledge of the state refiner's efforts to sway the policy decision of various agencies such as the finance and commerce ministries. Sinopec declined to comment. The revision came after Sinopec - Asia's largest refiner and the biggest buyer of US oil - suspended new bookings until at least October over worries that a 25 per cent tariff would prohibit it from finding buyers in China.

"The US will be the single largest source of new oil supplies outside Opec. It's in China's interest to diversify supplies," said a second source, a state oil trading manager. The move could encourage Sinopec to bring in cargoes loaded in June and July, and resume new bookings, the sources said, declining to be named due to the sensitive nature of the topic.

Some analysts say Beijing is bowing to China's heavy reliance on imported crude oil. "The issue for the Chinese is that any tariff on US exports, (including) oil, will likely hurt their economy disproportionately because they have to import," said Kenneth Medlock, senior director of the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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"US exports will find a home regardless of how the global supply deck is reshuffled," Mr Medlock said. Although crude oil has been dropped off the list, refined fuels including propane, kerosene, diesel and lubricants are among the products due to be levied an additional 25 per cent tax from August 23.

Propane will be the main item hit, with China's imports amounting to some $2 billion last year. Chinese imports of other refined fuels were negligible. China's US crude oil purchases shot to a record 553,000 bpd for June loadings, worth nearly $1 billion.

Dropping oil from the list could also be seen as a good-will concession that could help China win a waiver to keep buying Iranian oil even as US President Donald Trump threatens to choke off Tehran's oil exports completely, analysts said. China now takes in around 650,000 bpd of Iranian oil, trade worth roughly $15bn a year.

State oil giants China National Petroleum Corp (CNPC) and Sinopec have invested billions of dollars in Iranian oil fields, and have been importing their equity production. But if the US-China trade war is not scaled back, and Mr Trump carries through threats of tariffs on $200bn in Chinese goods, Beijing could put U.S. crude back on the list, the sources said.

"China's decision to drop crude may be an attempt to keep US crude as leverage for potential negotiations," Michal Meidan of Energy Aspect wrote in a client note on Thursday. But it could also just give Chinese buyers more time to bring in US crude they have already bought, she said.