China will need to overcome some challenges to be able to purchase large volumes of U.S. crude oil to comply with the phase-one trade deal, according to global energy consultancy Wood Mackenzie this week.
Beijing has committed to buy around $52 billion worth of energy goods from the U.S. in 2020 and 2021 under the phase-one trade deal signed by the countries last week.
"Larger purchases of U.S. crude oil exports will be the primary method for China to comply with this agreement," Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie said in a statement released on Monday.
China imported around 300,000 barrels per day (bpd) of U.S. crude oil in 2017, at a value of approximately $5.8 billion.
Wood Mackenzie said it estimates that Beijing could "optimally" import about 400,000 bpd of U.S. crude in 2021. However, the new trade deal suggests that China would need to import an average of about 1.1 million bpd of U.S. crude in 2020 and 2021.
A second challenge is in the type of crude that the U.S. produces, which is incompatible with Chinese refineries. Most Chinese refineries are designed to process medium- or heavy-type crude from the Middle East and Latin America, but the U.S.' crude is mostly tight oil.
A third hurdle is the lack of clarity as to whether there will be any waivers or exemptions applied to the 5% tariff that Beijing still imposes on U.S. crude imports, which according to Alan Gelder, vice president of refining at WoodMackenzie, "would discourage the country’s independent refiners from processing large volumes of U.S. crude."
"Chinese NOCs [national oil companies] with large integrated refinery and petrochemical sites are most likely to process the extra U.S. volumes," he said.
In addition to Beijing, the phase-one agreement also poses some challenges for major oil-exporting countries to China, such as OPEC members.
Saudi Arabia would want to maintain its market share in the growing Asian oil market, especially in China, but higher crude imports from the U.S. could mean that Beijing will make fewer purchases from OPEC countries.
"OPEC will need to send volumes to other nations in Asia and to Europe, backfilling those U.S. barrels that are now heading to China," Hittle said.
By Ovunc Kutlu