Source: Radio Free Asia, by Michael Lelyveld
China is stocking up on oil from the United States in an apparent effort to ease tensions with Washington, analysts say.
On Aug. 14, Reuters reported that China’s national oil companies (NOCs) had made shipping arrangements to import at least 20 million barrels of U.S. crude oil through September as part of a push to meet terms of a bilateral trade deal.
When it was signed on Jan. 15, the Phase 1 trade deal was hailed as a major breakthrough that averted an escalation of the near two-year-old U.S.-China trade war.
Under the agreement, China pledged to boost its U.S. energy imports by $52.4 billion (360 billion yuan) over a two-year period compared with 2017 levels.
The promised purchases were part of a $200-billion commitment that included $77.7 billion in manufactured items, $37.9 billion in services and $32 billion in agricultural commodities.
The text of the agreement required China to buy no less than $18.5 billion of energy products above the 2017 base level in 2020 and no less than $33.9 billion more in 2021.
China’s tentative booking of tankers for U.S. crude deliveries is seen as a sign that it is trying to address concerns that its imports will fall far short of the terms for this year.
As of June 30, China’s purchases of U.S. crude this year totaled only $2.06 billion, Reuters said, citing U.S. Census Bureau data.
According to a trade tracker compiled by the Peterson Institute for International Economics in Washington, China made only $39.3 billion in purchases of all U.S. goods covered by the agreement as of July, against a commitment of $142.7 billion for this year, based on U.S. export data.
The shortfall has been most acute in the energy category, touching off a scramble among China’s NOCs to improve the figures ahead of a six-month meeting to review compliance with the Phase 1 deal.
A review set for Aug. 15 was initially postponed “due to scheduling issues,” Reuters said.
On Aug. 18, President Donald Trump told reporters that he had postponed the talks, citing China’s responses to the spread of COVID-19.
“With what they did to this country and to the world, I don’t want to talk to China right now,” Trump was quoted as saying.
On Aug. 20, a spokesman for China’s Ministry of Commerce said the two countries had agreed to hold talks “in a few days,” state media reported, but the statement was not confirmed by the U.S. side.
On Aug. 24, the two countries held phone talks with U.S. Trade Representative Robert Lighthizer, U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He to discuss implementation of the agreement, according to official statements.
“Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement,” the U.S. statement said.
Despite the many months of tension and intense negotiations, the achievement of the Phase 1 agreement has been nearly forgotten in the avalanche of conflicts that followed the COVID-19 outbreak, which became known in Washington shortly after the deal was signed.
Since January, U.S.-China frictions have increased over issues ranging from the mistreatment of Uyghurs in Xinjiang, the suppression of rights in Hong Kong, claims to the South China Sea, the banning of Huawei from mobile phone networks, U.S. attempts to force the sale of social network TikTok, allegations of spying, the closure of China’s consulate in Houston and China’s shutdown of the U.S. consulate in Chengdu.
China’s belated attempt to honor its import commitments could be a signal of conciliation despite the discord.
The delay of the meeting on Phase 1 may have been part of an effort to keep non-compliance from adding to the list before the upcoming U.S. elections, said Edward Chow, senior associate in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington.
“I would say that both sides are trying to kick the can past Nov. 3. Neither side has any interest in admitting the Phase 1 trade deal failed to deliver,” Chow said.
“I have been surprised by how mild Beijing’s reactions have been,” said Chow. “I believe the Chinese have decided not to provoke Trump any more than necessary, except in matters they see as strictly internal, such as Hong Kong, Xinjiang and Taiwan.”
China’s increase in imports of U.S. oil is unlikely to be justified by purely commercial considerations.
“It’s politically driven for sure because there are a plethora of barrels being offered to Asia cheaper than what WTI lands,” a trader told Reuters, referring to the West Texas Intermediate grade of crude.
China imposed a 5-percent tariff on U.S. oil imports last September and did not rescind it as part of the Phase 1 deal.
The higher costs and refining requirements for WTI crude are not seen as impediments to more Chinese imports.
“It’s a mandate from higher up,” another Reuters source said, speaking of the import drive.
But even if China’s tanker bookings are meant as a signal, the country may have trouble meeting the terms of the Phase 1 agreement this year.
China has already splurged on oil imports despite the economic uncertainties of the pandemic, taking advantage of the worldwide glut that followed the COVID-19 crisis and the price war between Saudi Arabia and Russia earlier this year.
Oil buying set back-to-back monthly records as imports jumped from 11.3 million barrels per day (mbpd) in May to nearly 13 mbpd in June.
Crude imports in June soared 34 percent from a year earlier, Reuters said. In the first half of the year, China’s crude imports climbed 9.9 percent, according to customs data.
In July, China’s imports climbed 25 percent from a year before to 51.29 million tons (12.08 mbpd), boosting seven- month volumes to a 12.1-percent gain.
China’s crude imports from the United States rose more than six-fold in July from June to 3.67 million tons (26.9 million barrels), the General Administration of Customs (GAC) said in a statement this week.
Despite doubts about economic growth and domestic demand, much of the imports have been driven by independent refiners and fuel export opportunities.
While world oil prices have largely stabilized with moderate gains, they remain below the break-even point for much of China’s domestic production.
But the import surge has led to massive port backlogs with dozens of very large crude carriers (VLCCs) stalled offshore for weeks at a time.
At least 80 vessels were waiting over a month to unload oil at ports in northern China, The Wall Street Journal reported on Aug. 12. More than half were VLCCs, which can carry up to 2 million barrels of crude, traders said.
The VLCCs have been turned into floating storage, running up daily chartering costs. China’s onshore storage has been reported to be nearly full for months.
“They have no space to store the crude and the congestion is severe,” one tanker owner told The Journal.
The backups are not only a problem for logistics and further purchasing. They may also be an obstacle to meeting terms of the Phase 1 deal, which require that the agreed volumes be both “purchased and imported.”
The import spike has been “an optimistic sign for the global economy, however the pace has been so quick that it has challenged the logistical capabilities of Chinese ports,” Oilprice.com reported on Aug. 5, citing analysis by data provider OilX.
The analysts also pointed to “possible discrepancies between the classification of imports and vessels waiting to discharge.”
Although the backups may ease in coming months, the unprecedented conditions leading up to China’s port congestion suggest that the country may have difficulty meeting the terms of the Phase 1 agreement, even if that is part of its import plan.