Coronavirus havoc is drowning out China’s failure to buy U.S. crude, LNG, coal
Lost among the havoc being wreaked on crude oil markets by the new coronavirus crushing the world economy is the complete and utter failure so far of the deal for China to massively increase imports of U.S. energy.
It may be tempting to think that the collapse in U.S. crude prices will be enough to bolster the trade, which has only spluttered since Washington and Beijing signed a deal aimed at helping efforts to balance trade between the two.
The historic plunge of the front-month West Texas Intermediate (WTI) futures contract into negative territory on Monday was something of a technical issue related to the lack of available storage for May delivery, but it does underscore that the market is awash with crude.
A more realistic price for U.S. light crude is the WTI Houston physical price, as assessed by commodity price reporting agency Argus.
WTI Houston was at $21.57 a barrel on Monday, less than a third of its peak so far in 2020 of $66.65 in early January, but also well above the negative $37.63 the front-month WTI futures contract finished at on Monday.
If, for instance, the WTI Houston price is assumed to be representative of the price a Chinese refiner would pay for spot cargo, the question becomes why aren’t buyers flocking to the grade?
The deal between Washington and Beijing, signed on Jan. 15, called for a huge increase in China’s imports of U.S. energy, amounting to an additional $52.4 billion over 2020 and 2021 over a baseline of $9.1 billion in 2017.
Most of the increase would have fallen on crude, although China was also expected to bulk up on imports of U.S. coal and liquefied natural gas (LNG).
However, since the deal was signed, China’s imports of U.S. energy have barely ticked higher, and while it may be tempting to blame the coronavirus outbreak, that’s clearly not the case.
Given the lag between buying a cargo of crude and delivering it from the U.S. Gulf to China, it would have been unreasonable to expect much of an uptick in imports of U.S. energy before April.
Indeed, there was no U.S. crude imported by China in the first three months of 2020, and none is scheduled to arrive this month either.
For May, only three tankers, carrying a mere 4.63 million barrels, were expected to arrive before the end of the month, according to vessel-tracking and port data compiled by Refinitiv.
For June, it’s even more dismal, with only one cargo currently under negotiation, although it’s possible that more vessels can be arranged with a May departure date and a June arrival.
U.S. ENERGY ISN’T COMPETITIVE
For LNG, April marks the first month since March last year for U.S. cargo to arrive in China, with four vessels carrying 280,000 tonnes of the super-chilled fuel due to discharge by the end of the month.
A further two are scheduled to arrive in May, but even this volume is modest and nowhere near the rate of LNG imports in the first six months of 2018, when 25 U.S. ships offloaded at Chinese ports.
Coal is a similar story, with one vessel discharging in March, two scheduled for April (although one seems to be pottering around near Indonesia rather than heading to China), and two expected in May.
No matter how it is sliced and diced, China doesn’t appear to be making much effort to boost imports of U.S. energy, despite increasing its overall intake of crude oil by 5% in the first quarter of this year from the same period in 2019, coal by 28.4% and natural gas in the form of both LNG and via pipeline by 1.8%.
While there may be politics at play, it’s also worth noting that even at the current low price of WTI, it may not be competitive with similar quality light crudes from other regions.
June delivery Brent crude BFO-1M ended Monday’s trade at $26.73 a barrel, about $5 more than WTI Houston.
However, the demand for crude oil tankers has soared in recent weeks after Saudi Arabia said it would boost its exports in April to more than 12 million barrels per day.
This means that the cost of shipping a barrel of U.S. crude to Asia is around $7 currently, almost double the price from Europe and three times the cost from the Middle East.
This freight premium eats up much of WTI’s price advantage, and the current glut of crude means there is also no shortage of producers willing to sell oil at a discount to the price benchmarks.
Overall, U.S. energy exports will struggle in the current environment to compete in China, meaning that if Beijing is serious about at least looking like it is trying to stick to the trade deal, it will have to resort to arm-twisting.
It’s also worth pondering how long it will take U.S. President Donald Trump to start tweeting about the failing trade deal, especially as he is already ramping up rhetoric over China’s alleged failings in dealing with the coronavirus.