Between new sanctions on Iran and the potential for more escalation in the trade war with China, oil exports from the U.S. have been changing their flows dramatically in the past few months. China from October 2017 through July 2018 rivaled Canada as the largest buyer of U.S. crude; in June, when total U.S. exports hit a record 2.2 MMb/d, nearly one-quarter of those volumes flowed to China. But since trade tensions between the two nations intensified, not a single barrel of U.S. crude has arrived in China since July. Thankfully, the U.S. has found ways to fill the Chinese void by increasing the volumes sold to South Korea and India, two historically prominent buyers of Iranian oil. Today, we lay out the reasons why U.S. sanctions on Iran are helping the U.S. continue to sell crude to Asia, even as relations with China have chilled.
Before we discuss the trickle-down effects from pressure on Iran, let’s review the ongoing U.S. trade dispute with China. As we blogged about in Masters of War, this spat has intensified as the year progressed. Things got real for U.S. hydrocarbon exporters in August, when China enacted retaliatory import tariffs on petroleum-based products like LPG and refined products, which make up just a sliver of the total $60 billion in commodities and goods that were impacted.
Even though crude wasn’t affected on paper by China’s latest round of tariffs, the traders buying oil for Chinese refineries showed that they were not willing to take any chances — nobody wants to risk being exposed to a cargo being sanctioned while in transit. China, which surpassed Canada as the top buyer of U.S. crude for the first time in February 2017, reduced its imports from 384 Mb/d — the equivalent of nearly six 2-MMbbl Very Large Crude Carriers (VLCCs) in July 2018 to zero in August. Since then, we’ve only seen one VLCC full of crude indicate a journey to China, the supertanker New Courage, which we believe co-loaded U.S. and Venezuelan crudes before heading to the Far East several weeks ago. The ship first indicated a voyage to Ningbo, China, later changed its signal to Port Klang, Malaysia, and now is indicating a Chinese destination again. We’ll keep a close watch on this ship in our weekly Crude Voyager. (See Shake It Off for more on China’s history of buying U.S. crude.) We’ve previously opined that U.S. crude will still get to China via blended cargoes on rerouted tankers, but the Customs records will still show goose eggs for volumes directly shipped to China.