China has significantly reduced its imports of Iranian and Venezuelan crude oil in response to US sanctions, but future crude flows could hinge on an ongoing trade war.
"I think the Chinese have thus far tried to thread a variety of needles, with domestic constituencies and the Trump administration," said Richard Nephew, a senior research scholar at the Center on Global Energy Policy at Columbia University and the principal deputy coordinator for sanctions policy at the US State Department during the Obama administration. "If they decide they no longer want to, then I think that will also affect their attitude to US-sanctioned oil."
China's demand for crude subject to US sanctions could increase if trade talks remain stalled and hundreds of billions in tariffs ratchet up, Nephew and other analysts have told S&P Global Platts this week.
In addition, China may soon test the Trump administration's reluctance to sanction a major Chinese bank, due to the impact such an action would have on the global economy, if the trade dispute between the two nations drags on.
From January through July of this year, China imported about 414,800 b/d of Iranian crude, down more than 37% from January through July of 2018 when it imported more than 658,300 b/d of Iranian crude, according to China's General Administration of Customs.
Venezuelan crude imports into China fell more than 13% from more than 369,700 b/d in the first seven months of 2018, to about 325,900 b/d over the same timeframe in 2019, according to the latest data from China's customs agency.
"If you take together the amount of oil that we'd be expecting China to forego from Iran and Venezuela and reduce the likelihood of buying US oil because of tariffs, that doesn't really give much scope to find other suppliers without disrupting the market in some fashion," Nephew said. "I think that the reason we've not seen this yet is because China has still bought some Iranian, Venezuelan, and US oil and probably will continue to do so to varying degrees."
The US has not explicitly prohibited imports of Venezuelan crude, as it has with Iranian crude. But on August 5, President Trump signed an executive order threatening to freeze the US assets of any person or company it determines has materially assisted the Maduro government. The order does not explicitly sanction companies doing business with PDVSA, but administration officials have said it does serve as a final warning that sanctions will be imposed against any company continuing to trade with Venezuela's state oil company.
Since ending sanctions waivers that allowed Iran's top customers to continue purchases of Iranian crude, the US has sanctioned only one Chinese company for violating US restrictions on Iran's oil sector: state-owned trading company Zhuhai Zhenrong Ltd and its chief executive Youmin Li.
But analysts said the Trump administration remains unlikely to sanction a major Chinese bank, even as Chinese imports of Iranian and Venezuelan crude continue.
"As long as Trump thinks that a deal is somewhere on the horizon, he's prepared to do things that are coercive, he's prepared to talk tough, but there are thing that he knows are red lines," said Neil Bhatiya, an associate fellow with the Center for a New American Security's energy, economics and security program, in a recent interview with the Platts Capitol Crude podcast. "I don't think he's willing to go that far quite yet."
But what if that deal never materializes and retaliatory and escalatory tariffs continue?
"There's room for a tradeoff," said Kevin Book, managing director of ClearView Energy Partners.
Book said that while the US may be unwilling to offer China any formal relief from sanctions, some "flexibility" on enforcement could be offered as a bargaining chip in future trade talks. This would be highly unusual for the US, which typically separates commerce and national security issues, Book said, and it would not be a official agreement, which could muddy future enforcement of US sanctions.
"I would be very surprised if it were offered formally," Book said. "Diplomatic flexibility can go a long way."
Trump announced Friday the US will raise the tariffs on $250 billion worth of Chinese imports from 25% to 30% on October 1, and raise the current 10% tariff on another $300 billion of Chinese imports to 15% on September 1.
China announced earlier that day that it planned to levy a 5% tariff on US crude imports from September 1, part of a new round of tariffs on $75 billion worth of imports from the US.
On Monday, Trump repeated claims at a press conference in France that he believed China wanted to resolve the ongoing trade dispute with the US "very badly."
