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Oil Keeps US And China On The Boil

Author: Arpit Chandna/Wednesday, August 21, 2019/Categories: Exclusive

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Oil Keeps US And China On The Boil

The ongoing trade war between the US and China seems to be stretching beyond trade. Undoubtedly, America wants to impose its hegemony on global trade network but China is playing the big game for global oil market control. After Beijing's recent collaboration from multiple countries in One Belt & One Road initiative, the Donald Trump dispensation seems to be worried about the growing Chinese presence in most of the strategic trade gateways.

The trade conflict between the two global economic powers has intensified after the US imposed new tariffs of 10% on $300 billion worth of Chinese imports effective from September 1.

White house economic adviser Kudlow said trade deputies from both the nations will sit for a dialogue in the next 10 days to iron out differences. The global financial markets and energy sector are rattled over the tensions between the US and China.

In the energy sector, strategic crude oil trade partners Saudi Arabia and the US parted their ways. The US, a major buyer of Saudi Arabia oil, lowered its dependence by utilizing the shale oil boom in its own country. In response to the reimposition of the US sanctions on Iranian oil sales, Saudi Arabia has decided to export more crude oil to China and reduce export volumes to the US.

According to data by the US Energy information Administration, the US imports from Saudi Arabia declined by 32% in just two years and 20% lower on YOY basis. In July, the average US crude oil import from Saudi Arabia stood at 6.9 million bpd, 6% lower than June import volumes.

In its latest monthly report, Saudi Arabia had mentioned about replacing Russia as the top crude oil supplier to China in July with the exports volume of 1.8 million bpd which is 27% higher than 1.1 million bpd in June.

The lower exports to the US seems to have little impact. Saudi Aramco, the kingdom's state-owned oil company, owns Motiva refinery in Port Arthur in Texas and all Saudi exports are directed to this facility. Saudi is directing its crude oil exports to strengthen its relationship with China and also expand its market share.

China has managed to import crude oil from Iran by offloading some of the portion into bonded storage tanks. China is insulating itself from the US sanctions as the oil in bonded storage are yet to clear customs duties thereby suggesting officially zero import of Iranian oil. As per Refinitive Oil Research, around 4.4 million to 11 million barrels of Iranian crude were discharged into China during July. If China starts buying stored Iranian oil and sell it to its domestic buyers, an excessive availability of oil could pressurize the global crude prices downward. If the trade war gets intensified, China could buy Iranian crude oil ignoring the US sanctions. Iran and Saudi Arabia could also benefit from such a move. (The author is a fundamental research analyst at Karvy Comtrade Limited)


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