The trade war has heated up as more tariffs are being imposed on energy products with a Chinese refiner opting out of purchasing crude oil from the U.S., but this trend is not likely to continue, experts said.

Several media reports cited an official from Dongming Petrochemical Group, a refiner in China, who said that the company had halted crude oil purchases from the U.S. in retaliation to America’s tariffs. Instead, the refiner chose to buy crude oil from Iran.

China has imposed a 25% tariff on U.S. exports, which now includes energy products such as crude oil, LPG, gasoline, naphtha, fuel oil and natural gas.

The largest impact is expected to be on crude oil. Both state-owned and private Chinese buyers had been increasing imports of U.S. crude oil. China remains the largest buyer in Asia of U.S. crude oil and its imports rose in the first quarter to 316,770 barrels per day (bbl/d) and accounted for 23% of total U.S. crude exports of 1.67 MMbbl/d in March, according to data from the Energy Information Administration (EIA), the independent statistical arm of the Department of Energy based in Washington, D.C.

The majority of the imports from the U.S. are medium sour grades such as Mars and Southern Green Canyon, but China has added light sweet crudes such as WTI, Bryan Mound Sour and shale oil from Eagle Ford, according to a report from N.Y.-based S&P Global Platts.

Oil is less likely to be targeted for continued retaliation because the emergence of the Asian middle class and its demand for gasoline cannot be isolated from the supply in the U.S., said Ethan Bellamy, a managing director who covers energy stocks at Baird, a Milwaukee-based investment bank. The immediate impact is that it can make crude oil purchases less direct and efficient.

“The global crude oil market is anything but a series of bilateral arrangements between nation states,” he said. “It’s a highly liquid, messy, fungible commodity market handled by thousands of traders, shippers, producers, consumers, politicians, bandits, smugglers, thieves, pirates and brigands.”

A mandate from the Chinese communist party blocking one single trade movement will not move the needle on global supply and demand, Bellamy said.

“In this galaxy of commerce, it is great trader talk, and makes for a nice headline,” he said.

China needs to continue buying crude oil from the U.S. because the country currently buys on average 350,000 bbl/d from the U.S., said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business in Dallas. It has been as high as 500,000 bbl/d recently. China is the second largest customer from the U.S. behind Canada.

The country’s reliance on importing crude oil is increasing as it imports roughly 8 MMbbl/d as demand rises in China. The country also reported the largest decline in domestic petroleum and other liquids production among non-OPEC countries in 2016, according to a February report issued by the EIA.

If China does retaliate and slaps a tariff on U.S. crude oil, it is likely American producers will turn to India to buy its crude oil, he said. India currently buys from OPEC and other sources and is already reducing the number of barrels it buys from Iran due to the sanction threat.

“Interestingly, China has been increasing its crude purchases from the U.S. in order to help close the trade deficit with us involving crude oil in tariffs and the trade war will have the opposite of the intended effect for the U.S,” Bullock said.

The impact is likely to be short-term since the world is “consuming every barrel produced right now, so the oil will go somewhere,” he said.

China surpassed the U.S. in crude oil imports in 2017, importing 8.4 MMbbl/d compared with 7.9 MMbbl/d for the U.S, the EIA report said.

The fact that a Chinese refinery chooses Iranian crude over U.S. crude could also be an issue of price, said Patrick Morris, CEO of New York-based HAGIN Investment Management.

“I think that Iran must be facing pushback from certain buyers, like India potentially, that might fear U.S. retaliation for purchasing from Iran,” he said. “Therefore, I wouldn’t read too much into it. I think that there is ample demand for crude that will offset any source switching like this.”

Since 2016, Iran has been discussing the export of about 300,000 bbl/d of Karoun crude, which is a lower API crude in the mid-20s that might also be a good blending stock for the super light crude coming out of the Gulf of Mexico export terminals, Morris said.

The Karoun crude is greater than 2% sulfur so it has its own limitations, but it should price well against the super light low sulfur.

“I’ll stick with my assumption that while this has some political overtone, the price and grade combination is probably the driving factor,” he said.

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