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U.S. And China Could Close ‘Mini Trade Deal’


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Trade War Won’t Kill US Oil Exports

By Tsvetana Paraskova - Aug 29, 2019, 6:00 PM CDT

It’s been a year since the China-US trade war began, and up until this last week, China had refrained from slapping import tariffs on U.S. crude oil, even as it announced other measures in retaliation to U.S. import tariffs on Chinese goods. Those days are over.

Last week, the trade war finally caught up with U.S. crude oil exports to China. What does this mean for the US oil industry?

For a year now, Chinese refiners and traders have held their collective breaths, scared for the day when the government would finally unleash tariffs on U.S. crude oil imports. Now they’ll have the chance to test their strategies to hedge the risk of buying U.S. oil amid a tariff that caught China-bound tankers out at sea.

China announced on Friday that it would be imposing tariffs on US$75 billion worth of U.S. goods, including crude oil, in two batches beginning September 1 and December 15.  

The 5-percent tariff on crude oil—effective this coming Sunday—has caught several tankers carrying U.S. crude oil en route to China. Some of those tankers have already docked or will have arrived by September 1 at Chinese ports, but others won’t make the voyage in time, S&P Global Platts reports, citing ship-tracking data.

For a year now, Chinese buyers have been reluctant to buy U.S. crude oil, fearing that tariffs may come any moment, disrupting their plans and making their oil more expensive. Many of those who have continued to buy oil from America have been hedging risks by having the option for

alternative port destinations of the cargoes.    

Last month, Chinese imports of U.S. crude were estimated to have been at their highest level since the trade war began, according to customs data cited by Platts. China’s imports for August could also be high because some were rushing to get to China under the wire, before the tariff came into force. Yet, considering that the Chinese announcement came just a week before August ends, many oil tankers won’t make the more-than-55-day voyage in time to avoid tariffs.

Amid the trade war, China’s largest refiner Sinopec is now said to be drafting contingency plans for its U.S. imports since it has a term deal to buy up to four very large crude carrier (VLCC) cargoes—each capable of carrying 2 million barrels of oil—every month. According to Reuters’ sources, the tariff would make U.S. crude $3 a barrel more expensive for Chinese buyers.

Sinopec plans to apply for a kind of tax exemption for its imports of U.S. crude oil, sources told Reuters. The Chinese refiner is also considering storing oil from the U.S. in bonded storage, such that hasn’t cleared customs in China yet, or sending it on to other destinations, according to one of the sources to avoid the tariff altogether. Related: Natural Gas Prices Poised For Dramatic Price Increase

After somewhat higher imports in July and possibly August, Chinese imports of U.S. crude are expected to crash again after September starts and the tariff kicks in, analysts say, though some expect that China will continue to import—albeit at a very low rate—American oil.

According to JLC International, China will likely stop importing U.S. crude oil as of next month.

“As China stops importing its crude, the US will probably have to find more buyers for its still increasing oil production, but finding another market the size of China could prove challenging,” JLC International analysts said earlier this week.

Yet, total American crude sales to the Asian market will not be negatively impacted because other Asian countries have started to show increased appetite for U.S. grades that Chinese refiners wouldn’t want, S&P Global Platts reported earlier this week.

According to ESAI Energy analysts, most private Chinese refiners will shun U.S. oil, but some state-owned traders could keep importing U.S. oil at a pace of around 150,000 bpd– 200,000 bpd for the rest of this year, as they could seek options such as tariff waivers, storing the oil in bonded tanks, or diverting cargos to other Asian countries.  

“Overall, we expect U.S. exports of crude to Asia to grow from 1.2 million b/d in the first half of the year to about 1.3 million b/d for the balance of 2019, regardless of China’s tariff on U.S. Crude,” ESAI Energy says.  

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Analysts Cut WTI Oil Price Forecast Again

By Tsvetana Paraskova - Aug 30, 2019, 9:30 AM CDT

The protracted U.S.-China trade dispute and slowing economies and oil demand growth made analysts slash their forecasts for WTI Crude prices this year to the lowest outlook since January 2018, the monthly Reuters poll showed on Friday.  

According to 51 analysts and economists polled by Reuters, WTI Crude will average US$57.90 a barrel this year, down from the US$59.29 per barrel forecast in last month’s survey. WTI Crude prices have averaged US$57.13 this year and traded down 1.36 percent at US$55.94 at 08:17 a.m. EDT on Friday.

Analysts also slashed their forecast for the average Brent Crude price this year—to the lowest 2019 average forecast since March 2018. Experts now see Brent Crude averaging US$65.02 per barrel this year, down from the US$67.47 forecast in last month’s poll. So far this year, Brent Crude has averaged US$65.08 a barrel, while the international benchmark was down 0.6 percent at US$60.13 early on Friday.

Analysts cited the U.S.-China trade war and slowing growth in global economies as the key reasons for the significantly lowered oil price forecasts this month. Middle East tensions, monetary policies to support economies, the U.S. sanctions on Iran and Venezuela, and slowing U.S. shale growth could lend some support to oil prices, but right now the focus is on slowing economies and faltering oil demand growth, according to the analysts polled by Reuters. Related: BP Exits Alaska To Double Down On Shale

Several Wall Street investment banks have already warned that the escalating U.S.-China trade war raises the odds of an economic slowdown and subsequent low oil demand growth. Some banks have already cut their oil demand growth estimates for this year, saying that oil demand could grow at its slowest pace in at least half a decade.

The U.S. Energy Information Administration (EIA) lowered earlier this month its global oil demand growth outlook for 2019 to 1 million bpd.

The International Energy Agency (IEA) also revised its demand growth estimates for 2019 this month, down by 100,000 bpd to 1.1 million bpd, after seeing that between January and May demand growth was just 520,000 bpd, the lowest increase for the period since 2008.     

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Is OPEC’s No.2 Finally Cutting Production?

By Tsvetana Paraskova - Sep 09, 2019, 6:00 PM CDT

Since OPEC started restricting oil production, Iraq—the cartel’s second-largest oil producer behind Saudi Arabia—has exceeded its output cap almost every month for more than two and a half years now. But now Iraq says it is ready to get onboard.

Iraq says it is now ready to reduce its crude oil production next month, its oil minister, Thamer Ghadhban, said as quoted by Reuters. “We are committed to the agreement to reduce production,” the official said in a statement. Ghadhban’s statement runs counter to evidence, which shows that Iraq has consistently failed to comply with its production cut obligations ever since the first production cut agreement was inked.

For Iraq, the OPEC+ deal coincided with the time when the country managed to drive most of the Islamic State militants out of its territory in late 2017 and oil production started to steadily grow as security improved.

While Baghdad has argued that it needs higher oil production to get more oil revenues—which account for 90 percent of its government proceeds— to rebuild a country damaged by decades of wars, OPEC’s second-biggest oil producer has been putting a spoke in the cartel’s wheel to have all members fully compliant with the cuts.

Iraq’s continuous non-compliance has also created another reason for tension within OPEC, on top of Iran balking at other members (Saudi Arabia and allies) over what Tehran sees as rival producers within the cartel stealing its market share while Iran is under U.S. sanctions.

Iraq’s non-compliance reached a new high in August when it is estimated to have pumped a record-high volume of oil at 4.88 million bpd, the latest monthly S&P Global Platts survey showed last week.

Iraq pumped 100,000 bpd more in August than in July, exceeding Iraq’s output quota of 4.512 million bpd by a whopping 370,000 bpd last month, the Platts survey showed.

The Reuters survey also found Iraq increasing its production in August and estimates by both Reuters and Platts surveys point to OPEC having boosted oil production in August for the first time this year, despite its continuous calls for ‘full compliance’ and ‘market stability.’ Iraq was one of the biggest contributors to OPEC’s production rise in August, alongside Nigeria, according to the surveys.   

OPEC’s official August production figures are due out on September 11, but the previous Monthly Oil Market Report with data for July showed that Iraq booked the biggest production increase, raising output by 32,000 bpd to 4.753 million bpd in July, while Saudi Arabia cut its July output by another 134,000 bpd to stay more than half a million barrels of oil per day below its OPEC quota. Related: Russia Considers Possibility Of $25 Oil Next Year

OPEC also lifted its oil exports in August, ship tracking data by Bloomberg showed, and Iraq’s crude oil exports increased to 3.603 million bpd last month from 3.566 million bpd in July, according to data from Iraq’s oil ministry.

“The recent increases in Iraqi production turned what was a sort of minor headache for OPEC into a fully-blown migraine,” Dave Ernsberger, who is global head of commodities pricing at S&P Global Platts, told CNBClast week.

These production increases in Iraq drew the attention of OPEC’s kingpin Saudi Arabia, again. The cartel’s de facto leader has called out rogue members over their sketchy compliance record several times since the OPEC+ alliance began cutting production in January 2017.

Iraq has been the most non-compliant OPEC producer.

Last week, Saudi Arabia’s Crown Prince Mohammed bin Salman picked up the phone and called Iraq’s Prime Minister Adil Abd Al-Mahdi to discuss the two countries’ “collaboration efforts with other parties in OPEC and outside it, to control on Oil Market and to prevent the deterioration of oil prices,” the office of the Iraqi PM said.

A few days later, Iraq’s Oil Minister Thamer Ghadhban said on Sunday that Iraq would be cutting its oil production starting in October and will stick to the OPEC production cuts. Over the past few months, Iraq has pumped above its quota because of higher domestic demand in the summer, Ghadhban said, adding that refineries would enter maintenance in October and domestic demand would drop.

Iraq has ambitions to significantly boost oil production over the next few years, despite the ongoing OPEC-wide cuts. It remains to be seen if Baghdad will heed Saudi Arabia’s calls for full compliance this time around and finally start sticking to its production quota.

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https://oilprice.com/Energy/Energy-General/US-And-China-Could-Close-Mini-Trade-Deal.html

 

U.S. And China Could Close ‘Mini Trade Deal’

 

 

The U.S. and China are scrambling to ease tensions in an effort to head off another escalation in the trade war, a sign that both sides are feeling the pain.

Over the last week, both Washington and Beijing offered gestures of good will, delaying tariffs and exempting certain products from those levies. China announced a delay in tariffs; President Trump responded by pushing off planned tariffs by two weeks.

 

 

On Thursday, China said not only would it exempt U.S. soybeans, pork and other agricultural products from the latest tariffs, but some Chinese companies also moved to buy 10 shipments of American soybeans, according to Reuters. That amounted to the largest purchase of U.S. soybeans from private Chinese companies in more than a year, Reuters noted.

The easing of trade tensions helped to boost U.S. agricultural prices, which will be highly welcomed news to American farmers. Soybean prices jumped by 3 percent on the news.

All of these moves may not amount to much since existing tariffs remain in place, but they can be viewed as confidence-building measures. “The recent soybean purchases by China could form a good basis for the new trade talks,” Commerzbank said in a note.

Crucially, for President Trump, he is trying to repair his relationship with farm country, after angering them over the trade war as well as from policies that have damaged ethanol markets.

 

 

In fact, as Politico reports, advisers on Trump’s team are desperate to find an “escape hatch” from the planned increase in tariffs in both October and December. The economic toll heading into the 2020 election is political threat to the president’s reelection. Related: Are Oil & Gas Stocks On The Cusp Of Breakout?

In a separate report, Bloomberg said that Trump officials are considering an “interim deal” that delays planned tariffs. When asked about such a proposal, Trump did not dismiss it. “A lot of people are talking about, and I see a lot of analysts are saying: an interim deal, meaning we’ll do pieces of it, the easy ones first,” Trump said late Thursday. “But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider.”

It’s not clear what that might look like in practice, but it could amount to a status quo – existing tariffs remain in place, but the scheduled increases are scrapped. For its part, Beijing is hoping to separate trade talks from more contentious national security issues, according to the Wall Street Journal. That could smooth the way to an agreement on easing trade tensions at least.

Rapidan Energy suggests that the “mini deal” is possible, one that likely would consist of Chinese purchases of U.S. commodities and pledges to protect U.S. intellectual property, in exchange for tariff relief. That is likely the best case scenario as a true “grand bargain” remains “highly unlikely,” the consultancy says. Related: Rystad: Low Prices To Send Oil Services Market Into Recession

Any deterioration in the standoff between Beijing and Hong Kong could scuttle the mini deal, but the two sides are inching closer to a modest agreement. “President Trump’s two-week tariff delay announced last night indicates a mini deal is coming together, but he wants to be master of ceremonies when it’s announced,” Rapidan Energy wrote in a note.

For now, commodity speculators remain pessimistic about the trajectory of the trade war. “We think the constancy of the [money-manager positioning indices] for trade-war-sensitive commodities implies that there is a large amount of speculative positioning in commodities placed on the view that the US-China trade war will get significantly worse,” Standard Chartered wrote in a report. “We think that most investors have already positioned their commodity portfolios according to their view on that binary issue. Until the trade war significantly deepens or ameliorates, those positions are likely to be entrenched.”

Oil markets eagerly await the next twist and turn in this long running saga. While a grand bargain appears unlikely, even a suspension of scheduled tariffs would be welcomed.

 

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