Measuring the Impact of Trade Wars and Sanctions on U.S. Oil

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Measuring the Impact of Trade Wars and Sanctions on U.S. Oil

Anwar Altaqi – Esam Aziz

President Donald Trump has engaged the United States in a series of unconventional diplomatic, economic, and trade maneuvers with varying effects on the U.S. economy. But what’s the impact of the bold moves on the ascending American oil and gas sector?

At the end of September, U.S. crude oil shipments to China “totally stopped,” the president of China Merchants Energy Shipping Co (CMES) said. China has so far spared crude oil from tariffs. 

Chinese refiners may have been relieved by Beijing’s decision to remove U.S. crude from the list of goods in the tariff tit-for-tat, but they are staying away from purchases of U.S. crude as refiners and traders fear that the removal is only temporary, and China may slap tariffs on U.S. crude if the trade war further escalates.

U.S. oil exports started only in 2016 when the United States removed restrictions on crude exports, and exports been rising over the past year, hitting a record 510,000 barrels per day (bpd) in June 2018, before easing to 384,000 bpd in July, according to the latest available U.S. Energy Information Administration (EIA) data. According to Refinitiv Eikon ship tracking data, U.S. crude oil shipments to China plunged in September to just 600,000 barrels for the month, compared to 9.7 million barrels for the month of August. 

China is looking to replace U.S. crude oil because of the trade war, and is buying crude from west Africa at the highest level in seven years. Chinese refiners have purchased 1.71 million bpd of crude oil from west Africa for October loadings, the highest since at least August 2011, when Bloomberg started to compile the data.

On another front, U.S. oil companies were worried about President Trump’s trade war with Canada and Mexico. The U.S. president wanted to change the terms of the North American Free Trade Agreement (NAFTA). The U.S. oil and gas sector is definitely among the winners of the new NAFTA. The oil business convinced the White House to keep a number of features of the old NAFTA deal in the new agreement, including provisions that help protect U.S. oil companies’ investments abroad and allow for tax-free transport of raw and refined products across borders. 

But the favorable provisions in the old agreement remained unchanged. One example is the preservation of a system of resolving international trade disputes called “investor-state dispute settlement,” or ISDS. Under ISDS, multinationals can sue the governments of nations in which they work when those states issue new regulations. The system has attracted critics both on the left for derailing anti-pollution efforts and on the right for eroding U.S. sovereignty. Trump’s trade negotiators looked at the legal system with skepticism, too. The final deal does limit ISDS, but with a few key exceptions. Oil and gas is one of only five economic sectors, including telecommunications and transportation, to keep ISDS in the crucial Mexican market.

This was, by no means, the only gain of the U.S. oil and gas sector from Trumps bold moves. After South Korea became the first of Iran’s major oil customers to reduce imports to zero under American pressure, the nation’s biggest refiner is seeking alternative supplies to fill the gap. U.S. crude is on the shortlist.

South Korea is increasing purchases from the United States to make up for the drop in Iranian oil shipments before U.S. sanctions come into effect, according to a company spokesperson. Russia and Australia are other options, with the refiner already buying condensate, an ultra-light crude oil variety, from Russian producers, said the official, who asked not to be named because of internal policy. South Korea bought 3.08 million barrels of crude from the United States for July arrival, up from 1.04 million in March and 2.08 million barrels in April, a month before Trump said he would re-impose sanctions on Iran. It completely halted Iranian condensate shipments for August arrival.

In general, the tightening Asian market due to the Iranian sanctions offers opportunity for U.S. condensate producers to boost exports to the region. Condensate is especially popular with South Korea’s refiners, who have also been buying oil from countries including Australia, Norway, and Saudi Arabia.

India, another major buyer of Iran’s oil, is also planning to halt purchases from the Islamic Republic. While it’s unclear if top customer China will persist with purchases, India’s move shows that Trump’s measures are succeeding in squeezing Iran’s exports.

However, the Russians believe that China may offset the impact of sanctions on Iran, if Washington continues its trade war with Beijing. Russian Energy Minister Alexander Novak said recently that it is “possible” that China increases it purchase of Iranian oil. “We do not fully understand how the consumers from the Asia-Pacific region will react, and whether China will increase its imports [of Iranian oil]. There will be no change [on the market] if the flow of Iranian oil is redirected. There are a lot of uncertainties that we do not fully understand today,” Novak said.

During the first week of October, U.S. crude rose 1.6 percent to a four-year high, settling at $76.41. There are circulating expectations that oil will hit the $100-a-barrel mark sometime in the next few months. This will help U.S. fracking companies improve their shaky financial positions and start their second phase of growth: controlling global oil markets.