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China Intents to Take More Economic Distress in Trade War Says Analyst

China’s proposal to place tariffs on U.S. crude oil shows its intent on taking more economic distress in the trade war than some within the markets have anticipated, based on a Bank of America Merrill Lynch’s commodities analyst.

“They’re hurting themselves on the domestic front by making it tougher for home refineries to make money. They’re hurting themselves on the international front by making their refineries much less competitive,” mentioned Francisco Blanch, head of commodities and derivatives analysis at BofA.

Blanch said changes in shipping fuel requirements that happen early next year could “create a pretty big premium on light sweet grades that are mostly coming out of the U.S. as of late.” The world’s refineries are anticipated to seek more of the lighter crude to make the low sulfur fuel, required globally by the International Maritime Organization.

In asserting new tariffs on $75 billion in U.S. items Friday, China said it would put a 5% tax on oil starting Sept. 1. The U.S. now exports greater than 2.5 million barrels a day of oil, whereas it produces over 12 million barrels a day.

Blanch said China was not a giant purchaser of U.S. crude, and it has already cut imports from the U.S. It imported 120,000 barrels a day for the first half of the year, with most of it coming within the first quarter, he stated.

By contrast, China’s imports of Saudi Arabian crude are rising, and now whole about 1.9 million barrels a day. However, Saudi Arabia exports a heavy grade of crude oil.

Blanch estimates that the margin hit per barrel for China from the tariffs could be about $3 if China were importing and refining U.S. crude. The average refining margins around the globe are $5 to $7, he mentioned.

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