Energy

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

There's a new kid on the block, muscling in on crude sales to China. America is rapidly carving out a niche for itself, stepping in to fill the gap left by falling supplies from OPEC countries. 

As recently as last year U.S. crude-oil exports to China were puny. On average in 2016, companies shipped just 10,000 barrels a day to China -- that's less than two supertankers during the whole year.

The Quiet American
U.S. crude sales to China were a paltry 10,000 barrels a day in 2016
Sources: Bloomberg, China customs

The U.S. ranked 32nd in the list of Chinese import sources in 2016, according to data from the Chinese customs authorities. That's below Mongolia and Sudan, and only just above war-torn Yemen.

But all that has changed dramatically this year, with U.S. crude exports to China leapfrogging sales from OPEC countries such as Libya and China's neighbors Vietnam, Kazakhstan and Australia.

Rising Up the Ranks
Average exports in the last four months have pushed the U.S. up to 11th place among crude exporters to China
Sources: Bloomberg, China customs

The upward march extended through the first seven months of 2017. Sales averaged 131,000 barrels a day in the period, but over the last four months the daily average figure exceeded 200,000 barrels. That is enough to move the U.S. up to 11th place in the ranking of crude oil suppliers to China, putting it just behind OPEC heavy weights Venezuela, Kuwait and the U.A.E.

OPEC's bid to push up prices by restricting output, combined with China's apparently insatiable thirst for imported oil, have certainly helped open up a market for American suppliers. So too have low shipping costs and widening discounts for U.S. crude benchmark WTI against both North Sea Brent, which is used as a pricing reference for West African grades, and the Oman/Dubai average, used for pricing Middle Eastern exports to Asia.

Deeper Discounts
WTI's have become more attractive relative to other global benchmark crudes this year
Source: Bloomberg

Expect the U.S. ranking to gain further ground as producers look for outlets for rising volumes of production, even while the U.S. itself remains a net importer of crude. That may be sweet music to the ears of President Donald Trump, with rising oil sales helping to reduce the trade deficit with China.

But it will not be so comfortable for OPEC countries, who have long seen China and other emerging Asian countries as their core markets. Nor is it helping to drain global stockpiles. While the volume in storage in the U.S. is coming down, the volume held in China is still rising. Commercial stockpiles of crude and refined products in China have risen by 16.5 million barrels, or 5 percent, since the beginning of the year. Strategic stockpiles, which are not reported, have also almost certainly increased too. Not exactly the rebalancing OPEC is trying to achieve.

So Much for Rebalancing
China's commercial stockpiles of crude and products have both risen this year
Source: Bloomberg
Note: Stock levels relative to end-2016 baseline

With oil demand stagnating in the developed world, OPEC producers have turned to Asia, tying up markets with investments in refining and storage capacity in the region. It is no coincidence that initial output cuts by Saudi Arabia and other Persian Gulf OPEC countries back in January were targeted at buyers in Europe and North America, while supplies to Asian customers were largely unaffected.

Saudi Arabia has already ceded its position as China's biggest oil supplier to Russia, and this year has also seen fellow OPEC member Angola move into second place. And it'll be hard to regain that top spot: Russia looks set to consolidate its position as China's biggest crude supplier once the second string of a pipeline connecting oil fields in East Siberia to Chinese refineries comes into operation in January. That line will allow Russian producers to ship another 300,000 barrels a day of Siberian crude directly to China.

U.S. oil flows to China remain vulnerable to any increase in freight costs or a narrowing of the price differential to other global benchmarks. But while OPEC continues to restrict supply, neither of those looks like a big risk.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net