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Phase 1 Trade Agreement Implications

Feb. 24, 2020

Since the signing of the “Phase 1” trade deal between the US and China, the latter has been gradually removing tariff barriers on imports of products and services included in the deal.  In the latest announcement from the country earlier last week, China said it is ready to accept applications for tariff exemptions for close to 700 products originating from the US.  Liquified natural gas and crude oil were mentioned among those products.  This is seen by some as a sign that China is intending to make good on their Phase 1 promise to buy close to US $200 billion worth of US products and services within the next two years, including US $52.4 billion in additional energy purchases from a baseline of US $9.1 billion in 2017.  Should China execute the agreement, it is logical to expect VLCC ton-mile demand to increase. However, there are uncertainties throughout the entire process.

To meet commitments, China will have to import an estimated 455,000 b/d of crude in 2020.  We base our estimate to the 2017 mix of imports using a US $60/bbl average commodity price.  As we can see below, this amount will mark an increase of US $5.9 billion in crude oil exports for 2020, from the benchmark year of 2017 (before the beginning of the trade war).  In this absolute case, the increase represents about 14 VLCCs of additional demand.  It is interesting to point out that the latest crude balances data suggest that the expected increase in US crude exports in 2020 almost perfectly matches the expected increase in crude demand at refineries in China, at approximately 290,000 bbl/day.  With the Chinese tariffs on crude oil lifted, there is a higher chance for some of these barrels to come from the US, but we are uncertain on how it would make sense for refiners to source more American crude given the high competition from the AG and unfavorable freight economics at the moment.

Figure 1 - Estimated Impact from Phase 1 Deal

Source: McQuilling Services