US – China trade war with 2.7 m bl/d of Iranian oil at stake

SEB - Prognoser på råvaror - Commodity

We cannot let go of the fact that China now has dragged oil into the trade war (5% import tariff on US produced crude oil) and what it may lead to down the road if the trade war continues to intensify. The 5% tariff is insignificant for the oil market and for China. China is however the world’s biggest oil importer with imports rising 10% per year with no apparent weakness in growth there yet. It has strongly opposed the US sanctions towards Iran. It has so far chosen to reduce oil imports from Iran from around 600 – 700 k bl/d through 2016, 2017 and 2018 to now only 100 – 200 k bl/d. It has reduced imports significantly in order not to go directly in the face of the US but it still maintains a little import in order to manifest its full right to do so.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

According to US Secretary of State Mike Pompeo (on 20 August) the US sanctions towards Iran has removed 2.7 m bl/d of crude and condensates from the global oil market with Iranian exports of crude and condensates mounting to only 120 k bl/d in July (Refinitive Eikon). That is a LOT and explains why the front end of the crude oil market is in strict backwardation with Brent crude popping right back up to $60/bl every time it is sold off along with escalating US – China trade war news as well as publications of bearish leading indicators.

Now China has dragged oil into the trade war. It basically holds the oil market in its hands. If push comes to show and the trade war escalates out of hand a natural choice for China would be to open its gates for Iranian oil imports. That would undo all of Donald Trump’s Iran sanctions and naturally totally sink the oil price as there would suddenly be an additional 2.7 m bl/d of liquids available to the market. That would be great for China but not so great for US as an emerging oil exporter. We keep a keen eye on Adrian Darya 1 which now sails around in the Mediterranean sea with 2 m barrels of Iranian crude oil. Will it set sail for China?

What will China do with respect to Iranian oil imports is now a key issue vs bull/bear oil view.

Ch1: Iranian crude and condensate production, consumption and exports. Total exports has fallen from around 2.9 m bl/d to close to zero in July with a decline of 2.7 m bl/d according to US Secretary of State Mike Pompeo

Iranian crude and condensate production, consumption and exports

Ch2: China apparent oil demand holding with no obvious weakness

China oil demand

Ch3: China crude oil imports rising to 10 m bl/d, higher and higher

China crude oil imports rising to 10 m bl/d, higher and higher

Ch4: China crude oil imports are growing 10% pa. It needs oil from the Middle East

China crude oil imports are growing 10% pa. It needs oil from the Middle East

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