Second COVID wave quenches China’s thirst for American Crude

As the second wave of Covid-19 infections rears its head in China’s capital once more, it now looks likely to depress the nation’s appetite for American oil just after a pick-up in purchases.

It now appears that newly weakening demand from the world’s largest oil consumer is beginning to weigh on export prices for American crude, according to industry participants. West Texas Intermediate oil for supply in August along the U.S. Gulf Coast is now trading at about 80 to 90 cents a barrel above Nymex futures, down from a nearly $1.15-a-barrel premium last week, they said.

Prior to the fresh outbreak in Beijing that has now begun spreading to neighboring provinces, purchasers in China were snapping up cheap U.S. oil with crude processing at local refineries climbing even higher last month than before the pandemic began. But shipments look to take a hit over the next few months after record purchases in May crushed port infrastructure, another signal of limited interest in U.S. crude and weaker pricing to come.

About 23 million barrels of American crude oil that were bought for loading in May were sent to domestic refineries and only 12 million barrels are now en route to China this month, a majority of those shipments left from the U.S. Gulf Coast and two have already departed from the U.S. Virgin Islands. During Covid-19 quarantines, China’s consumption of petroleum had dwindled: In April, just 2 million barrels were destined for the Asian superpower.

The cost of China’s buying spree that helped fill its strategic reserves combined with voracious demand from domestic refineries, has led to heavy congestion in Chinese ports, buyers have also been tapping floating storage filled with crude that has been sitting offshore for months. Hundreds of oil tankers were seen reaching China’s coast this month with many taking longer than normal to unload amid limited onshore storage space.

The turnaround in China’s purchasing of U.S crude is also having an effect on the freight market. Charter rates for Very Large Crude Carriers for shipment from the U.S. Gulf to China are now about $6.5 million, $1 million cheaper from earlier this month. The softer export demand is also likely a contributing factor to the rising crude inventories along the Gulf Coast, home to some of the largest U.S. refineries, where an oil pile-up is sitting at a record high.

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