China is going easy on American oil (for now). Here’s why

US oil has so far been spared China’s tariff wrath even as the deepening trade war ensnares other American commodities.

China hasn’t been shy about targeting everything from liquefied natural gas and cotton to soybeans. Although China has tapered its purchases of US oil, officials there have so far avoided placing outright tariffs on crude from the world’s leading producer.

The decision to go easy on US oil reflects Beijing’s desire to keep its options open, especially as crude supplies from Venezuela and Iran dwindle and tensions in the Middle East rise.

“It’s safer to tariff LNG,” said Ryan Fitzmaurice, energy strategist at Rabobank. “China is a huge consumer of oil. There’s a big appetite as people move into the middle class.”

The US-China trade war has escalated dramatically in recent days. The Trump administration on Friday raised tariffs on $200 billion of Chinese goods to 25%, up from 10%. China retaliated on Monday, increasing tariffs on about $60 billion of US goods, including cotton, machinery, grains and aircraft parts.

Booming LNG caught in trade war

LNG was included in the list of products now facing 25% tariffs, up from the 10% levy that China imposed in September.

If not for the trade war, China and the United States would seem like a perfect match on LNG, which is super-cooled natural gas that can be transported by ship. China is the world’s fastest-growing LNG market as Beijing tries to improve its pollution problem by shifting away from coal.

Thanks to the shale boom, the United States has more natural gas than it knows what to do with. Today, the United States is the world’s fastest-growing exporter of LNG.

BEIJING, CHINA - JANUARY 07: Customers gather as they take part in a class to learn how to use their iPhones at an Apple Store on January 7, 2019 in Beijing, China. Apple Inc. lowered its revenue guidance last week, blaming China's slowing economy and weaker than expected iPhone sales, as the company's chief executive officer Tim Cook said in a letter to investors the sales problems were primarily in its Greater China region that accounts for almost 20 percent of its revenue and includes Hong Kong and Taiwan. (Photo by Kevin Frayer/Getty Images)

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However, the United States has delivered just four LNG cargoes to China since those tariffs took effect, according to consulting firm Wood Mackenzie. That compares with 35 cargoes during the prior September through April period. US LNG exports have otherwise risen sharply over the past nine months – as have Chinese LNG imports.

“These retaliatory tariffs dampen the prospects for the growing US LNG investment, hurt US workers, and benefit America’s foreign competitors,” the American Petroleum Institute, a lobbying group representing the energy industry, said in a statement on Monday.

China’s decision to crack down on US LNG reflects the fact that it can source it from elsewhere, especially during a time like now when supplies are plentiful. Australia and Qatar are larger LNG producers than the United States, although America is expected to surpass each of them in 2022.

“The LNG market turned into a buyer’s market over the past year,” JBC Energy wrote in a note to clients on Tuesday.

Record-breaking oil imports by China

The oil market, on the other hand, has tightened up because of supply cuts by OPEC, geopolitical issues and robust demand from China.

China’s already-massive imports of oil have climbed to a record 10.3 million barrels of oil per day on average since November, according to RBC Capital Markets.

“China has been backing up the truck and importing oil at breakneck speeds,” said Michael Tran, RBC’s director of global energy strategy.

A Saudi Aramco logo sits on display during the Abu Dhabi International Petroleum Exhibition & Conference (ADIPEC) in Abu Dhabi, United Arab Emirates, on Tuesday, Nov. 13, 2018. OPECs secretary-general, energy ministers from Saudi Arabia to Russia, CEOs at oil majors from Total SA, BP Plc and Eni SpA, and officials from Middle Eastern energy giants such as Abu Dhabis Adnoc have gathered to sign deals and discuss oil, gas, refining and petrochemical issues. Photographer: Christopher Pike/Bloomberg via Getty Images

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Some of China’s epic oil demand would normally be met by Venezuela and Iran. But US sanctions on both OPEC nations, along with the deepening crisis in Venezuela, have cast doubt on China’s ability to obtain those barrels.

Given those concerns, China has been stockpiling about 350,000 barrels of oil per day, according to RBC.

“They are working on a rainy-day fund,” Tran said.

Despite the trade war, the United States still ships vast amounts of oil to China, albeit at a slower pace these days.

US oil exports totaled 145,000 barrels per day in February, according to the most recent stats from the US Energy Information Administration. That’s down from the recent peak of 510,000 barrels per day in June 2018.

Will oil get targeted next?

The reduction in purchases by China likely reflects uncertainty caused by the trade war.

“Chinese refiners have been hesitant to take US crude given the overhang of potential tariffs,” said Rabobank’s Fitzmaurice.

Imposing tariffs on US oil may not have been very effective because crude is a global market. Shipments could just go elsewhere.

“It is of little benefit in a tariff tit-for-tat escalation,” said Alan Gelder, vice president of refining, chemicals and oil markets at Wood Mackenzie.

However, China may have little choice but to target oil if the trade battle continues to escalate. The Trump administration is considering putting tariffs on the remaining $300 billion worth of goods China exports to the United States. That all-out trade war scenario would require a response by China.

“China is running out of things to tariff,” said RBC’s Tran. “Oil is an obvious next step.”