Will China Go Through with Oil Tariffs?

China's warned again it will slam import duties on US oil. Will it make good on the threat?

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I don't know about that, but I do know that global trade can rearrange itself.  If China doesn't buy from the US, it will buy from somewhere else who won't have oil for other customers who will be forced to buy from the US.  In the short term, you get price fluctuations.  This is the signal that produces change.  In the long run - where the definition of "long" depends on the specifics of what's being traded - prices reach an equilibrium very close to their initial state. 

For example, in the very long run, the US will probably build oil refineries to handle our light oil.  In the short run, we'll import heavy oil - which our refineries are optimized to handle - and sell our light oil on the market.  Since the existing refinery fleet isn't optimized to handle so much light oil, we'll sell it at a small discount until old refineries are replaced or upgraded.  That doesn't seem like a catastrophe. 

On that note, many of Trump's actions seem designed to redirect global trade flows, which makes some sense.  We want to reduce exposure to risky regimes - and if anyone is risky, it's China.  They literally wrote the book on how to win a war without fighting it and will take every advantage, however illegal, if it thinks it can.  Business relies on trust, contracts are written in spoken language, and spoken language is imprecise.  There will always be loopholes.  My opinion is that the best way to do business with an untrustworthy partner is to not.  Some trade redirection seems like the cheapest way to accomplish that. 

Now that I think about it, sanctioning Iran just opened up a large supply of oil for China, so China may not have much to lose from enacting oil tariffs.  China saves face and gets to look like the global good guy, and Trump supports his base.  I don't see a loser in China enacting oil tariffs.  Thoughts? 

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(edited)

1 hour ago, mthebold said:

Now that I think about it, sanctioning Iran just opened up a large supply of oil for China, so China may not have much to lose from enacting oil tariffs.  China saves face and gets to look like the global good guy, and Trump supports his base.  I don't see a loser in China enacting oil tariffs.  Thoughts? 

Right now today there are four VLCC's sitting off some port in China waiting for the last two months to unload, with 2 million barrels each, and BP paying a charter fee of $50,000 a day each ship while the waiting goes on.  The customers are the "teacup" refiners, small operations that buy on the open market and manufacture for the fringe markets inside China.  China is not some big controlled mega-society; it consists of disparate markets some of which are hardly controlled from Central, and run by what are in effect local warlords.  When Central gets fed up with the graft they go out and round up the usual suspects, have a quick 20-minute trial, then off to the edge of town for a bullet in the back of the head.  That is common enough over there. 

Meanwhile, these teacup refineries are sitting under the thumb of two forces: a drop in demand (and a loss of cash to pay for that fresh crude), and a clampdown on their tax-evasion games that those guys are so good at.  Since nobody wants to get shot, the oil sits for now until the heat is off. What all this tells you is that the Chinese oil market is not uniform, there are different prices and demands depending on whom you are selling to.  Will that result in China putting a tariff on US light?  Probably not.  Until the oil from the South China Sea starts flowing, I think China will be cautious not to bust up its various sources of supply.  Right now, they can play off various suppliers against each other.  If they go toe-to-toe with The Donald, then that puts them at the pricing of the next country (presumably Iran).  Not in their interests. 

You also want to remember that China Shipping has this huge fleet of containerships.  Those engines are able to run on North Dakota crude "straight," they can take it from a railcar and dump the stuff right into the ships bunkers, burns just fine.  So why blow off a cheap supply of ship oil just for show?  Then you pay a premium for having oil brought to your ship as marine oils. And those ships use a lot of the stuff. 

Edited by Jan van Eck
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9 hours ago, Jan van Eck said:

Right now today there are four VLCC's sitting off some port in China waiting for the last two months to unload, with 2 million barrels each, and BP paying a charter fee of $50,000 a day each ship while the waiting goes on.  The customers are the "teacup" refiners, small operations that buy on the open market and manufacture for the fringe markets inside China.  China is not some big controlled mega-society; it consists of disparate markets some of which are hardly controlled from Central, and run by what are in effect local warlords.  When Central gets fed up with the graft they go out and round up the usual suspects, have a quick 20-minute trial, then off to the edge of town for a bullet in the back of the head.  That is common enough over there.  

Meanwhile, these teacup refineries are sitting under the thumb of two forces: a drop in demand (and a loss of cash to pay for that fresh crude), and a clampdown on their tax-evasion games that those guys are so good at.  Since nobody wants to get shot, the oil sits for now until the heat is off. What all this tells you is that the Chinese oil market is not uniform, there are different prices and demands depending on whom you are selling to.  Will that result in China putting a tariff on US light?  Probably not.  Until the oil from the South China Sea starts flowing, I think China will be cautious not to bust up its various sources of supply.  Right now, they can play off various suppliers against each other.  If they go toe-to-toe with The Donald, then that puts them at the pricing of the next country (presumably Iran).  Not in their interests. 

You also want to remember that China Shipping has this huge fleet of containerships.  Those engines are able to run on North Dakota crude "straight," they can take it from a railcar and dump the stuff right into the ships bunkers, burns just fine.  So why blow off a cheap supply of ship oil just for show?  Then you pay a premium for having oil brought to your ship as marine oils. And those ships use a lot of the stuff. 

This is probably just my ignorance, but I'm not seeing how the teapots affect China's decision making.  What am I missing?

As for cheap marine oil, I see your point, but I imagine they'd replace US light oil with other light oils - light oil being plentiful world wide right now.  Can they not dump foreign crude directly into their ships?

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3 minutes ago, mthebold said:

This is probably just my ignorance, but I'm not seeing how the teapots affect China's decision making.  What am I missing?

As for cheap marine oil, I see your point, but I imagine they'd replace US light oil with other light oils - light oil being plentiful world wide right now.  Can they not dump foreign crude directly into their ships?

You can only put in the crude that is available at that dock. 

Sure, you can bunker crude or some derivative when loading in Singapore, but then you pay Singapore prices.  Which is going to be more, and possibly quite a bit more, than you would pay for Bakken. 

What you are missing with the teapot refiners is that they are little bellwethers, telling you that the market is not as robust ans the Oil Traders would have you believe.  They are a final market segment, filling in the blanks.  If China had this massive need for say diesel and jet-fuel, do you seriously think it would let 8 million barrels of fresh light crude just sit there for months?  No chance. 

China is already not consuming what its refineries can process.  If you have shut-down refining capacity, then the demand is already busting.  When people tell you that China needs more oil, and a lot more, don't believe it.  China already has too much oil internally, and is turning the stuff away, even when it is just sitting there, and probably available at a discount at this point, just so that BP can unload the stuff and release the tankers. 

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3 hours ago, Jan van Eck said:

What you are missing with the teapot refiners is that they are little bellwethers, telling you that the market is not as robust ans the Oil Traders would have you believe.  They are a final market segment, filling in the blanks.  If China had this massive need for say diesel and jet-fuel, do you seriously think it would let 8 million barrels of fresh light crude just sit there for months?  No chance.  

That's fair enough on the pricing.  I suppose I could quibble about exactly how much cheaper Bakken oil is, but since I don't know how to go about that, I'll defer to your knowledge. 

Teapots as bellwethers sounds plausible, but let's play devil's advocate:

China has a long history of bringing industries under central control.  Is it possible they've expanded capacity at the central refineries and set regulations specifically to squeeze out the teapots?  Or are you saying that, if that were the case, these oil ships would already have unloaded at the central refineries?

Alternatively, what if China's central reserve scooped up oil when the price was low and is selling it back now that the price is high?  Internal demand could remain the same even as we see import fluctuations.  The teapots, of course, would bear the brunt of this.

China is electrifying at a rapid pace, but my understanding is that this handles expansion of their vehicle fleet at best.  I don't imagine electrification could cause a sudden drop in demand.  What else accounts for the change? 

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14 hours ago, Jan van Eck said:

Right now today there are four VLCC's sitting off some port in China waiting for the last two months to unload, with 2 million barrels each, and BP paying a charter fee of $50,000 a day each ship while the waiting goes on.  The customers are the "teacup" refiners, small operations that buy on the open market and manufacture for the fringe markets inside China.  China is not some big controlled mega-society; it consists of disparate markets some of which are hardly controlled from Central, and run by what are in effect local warlords.  When Central gets fed up with the graft they go out and round up the usual suspects, have a quick 20-minute trial, then off to the edge of

You also want to remember that China Shipping has this huge fleet of containerships.  Those engines are able to run on North Dakota crude "straight," they can take it from a railcar and dump the stuff right into the ships bunkers, burns just fine.  So why blow off a cheap supply of ship oil just for show?  Then you pay a premium for having oil brought to your ship as marine oils. And those ships use a lot of the stuff. 

But are those VLCC's loaded with US crude? China doesn't buy much crude from the US, so it's largely symbolic if they slap a tariff on it. I'd be more interested if they said they were going to slap a tariff on LNG, as they buy a lot and the US is ramping up exports.

Regarding container ships burning straight crude, yes they can, but no owner of a modern vessel is going to burn that and void the warranty on the engine.

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3 hours ago, Refman said:

But are those VLCC's loaded with US crude? China doesn't buy much crude from the US, so it's largely symbolic if they slap a tariff on it. I'd be more interested if they said they were going to slap a tariff on LNG, as they buy a lot and the US is ramping up exports.

I don't know what those VLCCs are loaded with (anyone? Bueller? Bueller?) Do we have any Tanker Trackers people here yet? They've been invited, I know.

But as far as buyers of US oil is concerned, China is one of the biggest: second only to Canada as of April. EIA data doesn't go past April, but I think it was Bloomberg who suggested that US-to-India crude oil shipments were up 9x in May over April. This is where some analysts are suggesting the extra US oil may go that may no longer go to China. And conveniently enough, India is going to be cutting back its oil imports from Iran at the request of the United States, so... looky there! It all works out swimmingly in the end. 

 

 

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39 minutes ago, Rodent said:

I don't know what those VLCCs are loaded with (anyone? Bueller? Bueller?) Do we have any Tanker Trackers people here yet? They've been invited, I know.

 

Rodent, I was under the impression that they loaded at Bayport (Texas), so that would be US Crude. 

Apparently there is some slightly offshore terminal pier that can accommodate the VLCC.  Those are seriously big suckers. 

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(edited)

7 hours ago, Refman said:

Regarding container ships burning straight crude, yes they can, but no owner of a modern vessel is going to burn that and void the warranty on the engine.

Now that is a very interesting tidbit.  I never heard of an engine builder vacating a warranty.  The oil they will run on is the left-over slop from the bottom of the refinery column, the bunker.  Why on earth would the machinery builder vacate for straight crude?  Also, the China Shipping guys tend to buy their boats from Chinese yards, presumably with Chinese diesels built under license. I don't picture those parties getting involved in disputes about the fuel.  If anyone has further details, please do chime in. 

Edited by Jan van Eck
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2 hours ago, Jan van Eck said:

Rodent, I was under the impression that they loaded at Bayport (Texas), so that would be US Crude. 

Apparently there is some slightly offshore terminal pier that can accommodate the VLCC.  Those are seriously big suckers. 

The only location that can currently fully load a VLCC in the US is the Louisiana Offshore Oil Platform (LOOP). There have been a couple of loads from that facility, but the problem is the LOOP was designed as a discharge platform with 3 mooring facilities. There is only 1 line connecting the LOOP to shore, so if 1 VLCC is loading the other 2 vessels cannot discharge. Kind of screws up the throughput on the facility when you can only do one or the other. 

There are some facilities that can partially load a VLCC but the ports are not deep enough to fully load. So they can maybe load them 1/3 or 1/2 full, they then have to go offshore and receive the rest of their cargo from shuttle tankers, which is less than ideal. 

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Actually, the day rate for VLCC is presently $30,000.  And half the load of the 4 VLCC's consists of Angolan oil.  There are approximately 600 million dollars of oil in those idled containers.  And the Teapot refiners must pay upfront before oil is offloaded.  Currently, there is a cash crunch in China.  Eventually, the ships will be diverted to other buyers from another nation if  China cannot  come up with the necessary cash.

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On 7/7/2018 at 12:01 AM, Jan van Eck said:

Now that is a very interesting tidbit.  I never heard of an engine builder vacating a warranty.  The oil they will run on is the left-over slop from the bottom of the refinery column, the bunker.  Why on earth would the machinery builder vacate for straight crude?  Also, the China Shipping guys tend to buy their boats from Chinese yards, presumably with Chinese diesels built under license. I don't picture those parties getting involved in disputes about the fuel.  If anyone has further details, please do chime in. 

Crude is far more volatile than residual fuel oil

You can walk on cold residual fuel oil its that thick. Can't do that with crude. 

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1 hour ago, NickW said:

Crude is far more volatile than residual fuel oil

You can walk on cold residual fuel oil its that thick. Can't do that with crude. 

Nick, the bunker fuel is extensively heated and filtered long before it reaches the motor.  Figure between 150 and 200 F. 

In any event, I have never heard of an engine builder "vacating the warranty."  Either the fuel being supplied fires the motor or it does not.  The bigger concern for both the owner and the builder is the running of the engine at reduced load and reduced rpm's.  Under those conditions the engine is unstable as it does not stay hot enough, and the exhaust (which spins the turbos) is not hot enough, and you get oil blow-through and carbon build-up everywhere, including the pistons, liners, piston rings, into the turbochargers, and the exhaust stack, where flue fires will erupt. Right now there is a lot of talk on "slow steaming" in order to save fuel costs (and effectively reduce the number of ships in service, as there is over-capacity in the marine shipping industry).  But the problem with slow-steaming is that certain rpm bands will cause serious problems to the motors. So the jury is still out on how the industry will respond.  

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1 hour ago, Jan van Eck said:

Nick, the bunker fuel is extensively heated and filtered long before it reaches the motor.  Figure between 150 and 200 F. 

In any event, I have never heard of an engine builder "vacating the warranty."  Either the fuel being supplied fires the motor or it does not.  The bigger concern for both the owner and the builder is the running of the engine at reduced load and reduced rpm's.  Under those conditions the engine is unstable as it does not stay hot enough, and the exhaust (which spins the turbos) is not hot enough, and you get oil blow-through and carbon build-up everywhere, including the pistons, liners, piston rings, into the turbochargers, and the exhaust stack, where flue fires will erupt. Right now there is a lot of talk on "slow steaming" in order to save fuel costs (and effectively reduce the number of ships in service, as there is over-capacity in the marine shipping industry).  But the problem with slow-steaming is that certain rpm bands will cause serious problems to the motors. So the jury is still out on how the industry will respond.  

Yes - that's the point I was making regarding the difference between RFO and Crude😉

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(edited)

7 hours ago, Jan van Eck said:

But the problem with slow-steaming is that certain rpm bands will cause serious problems to the motors. So the jury is still out on how the industry will respond.  

Never heard of slow steaming causing problems, but I have heard of burning crude as bunker causing problems. 

 

EDIT: A google search does indicate problems on slow steaming, some interesting info 

Edited by Refman

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On 7/6/2018 at 11:47 AM, mthebold said:

I don't know about that, but I do know that global trade can rearrange itself.  If China doesn't buy from the US, it will buy from somewhere else who won't have oil for other customers who will be forced to buy from the US.  In the short term, you get price fluctuations.  This is the signal that produces change.  In the long run - where the definition of "long" depends on the specifics of what's being traded - prices reach an equilibrium very close to their initial state. 

For example, in the very long run, the US will probably build oil refineries to handle our light oil.  In the short run, we'll import heavy oil - which our refineries are optimized to handle - and sell our light oil on the market.  Since the existing refinery fleet isn't optimized to handle so much light oil, we'll sell it at a small discount until old refineries are replaced or upgraded.  That doesn't seem like a catastrophe. 

On that note, many of Trump's actions seem designed to redirect global trade flows, which makes some sense.  We want to reduce exposure to risky regimes - and if anyone is risky, it's China.  They literally wrote the book on how to win a war without fighting it and will take every advantage, however illegal, if it thinks it can.  Business relies on trust, contracts are written in spoken language, and spoken language is imprecise.  There will always be loopholes.  My opinion is that the best way to do business with an untrustworthy partner is to not.  Some trade redirection seems like the cheapest way to accomplish that. 

Now that I think about it, sanctioning Iran just opened up a large supply of oil for China, so China may not have much to lose from enacting oil tariffs.  China saves face and gets to look like the global good guy, and Trump supports his base.  I don't see a loser in China enacting oil tariffs.  Thoughts? 

I sincerely hope that the US does not start building refineries to handle LTO until the shale game is proven not to be a house of cards built on a mountain of debt. The 'sweet spots' have been drilled, the rig count is going down and there are pipeline and skilled worker constraints. Furthermore, get on Google Earth and look west of Midland, Texas. See all those little white dots? Those are well locations. At some point each and every one will need to be plugged and abandoned - who will pay for that when these outfits declare bankruptcy?

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