Oil Shipments from US to China are Transforming Trade Ties Between the Two Nations

Gradually, US petroleum industry is turning world oil markets inside out.

First, sharp drops in US imports of crude oil eroded the biggest market that producers like OPEC had relied on for many years. Now, surging US exports — largely banned by Washington until just two years ago — challenge the last region Opec dominates: Asia.

US oil shipments to China have surged, creating trade between the world’s two biggest powers that until 2016 just did not exist, and helping Washington in its effort to reduce the nation’s huge trade deficit with China.

The transformation is reflected in figures released in recent days that shows the US now produces more oil than top exporter Saudi Arabia and means the Americans are likely to take over the No.1 producer spot from Russia by the end of the year.

The growth has surprised even the official US Energy Information Administration, which this week raised its 2018 crude output forecast to 10.59 million bpd, up by 300,000 bpd from their last forecast just a week before.

When US oil exports appeared in 2016, the first cargoes went to free trade agreement partners South Korea and Japan. Few expected China to become a major buyer. Data in Thomson Reuters Eikon shows US crude shipments to China went from nothing before 2016 to a record 400,000 barrels per day (bpd) in January, worth almost $1 billion. Additionally, half a million tonnes of US liquefied natural gas (LNG) worth almost $300 million, headed to China from the US in January.

The US supplies will help reduce China’s huge trade surplus with the US and may help to counter allegations from US President Donald Trump that Beijing is trading unfairly.

“With the Trump administration, the pressure on China to balance accounts with the US is huge... Buying US oil clearly helps toward that goal to reduce the disbalance,” said Marco Dunand, chief executive and co-founder of commodity trading house Mercuria.

As the energy exports rose, China’s January trade surplus with the US narrowed to $21.895 billion, from $25.55 billion in December. The energy sales to China are still modest compared with the $9.7 billion of oil shipped by the Opec to China in January. But they are already cutting into a market dominated by Saudi Arabia and Russia — with the threat of much more to come.