It was a gusher few expected. What began as a trickle of U.S. crude being sold to China is turning into a flood, the result of a surprise American glut that has made the country's oil cheaper than Mideast rivals just two years after Congress lifted a 40-year export ban.
China, one of the world's largest oil importers, bought nearly 100,000 barrels of oil a day from the U.S. in the first five months of 2017 -- 10 times the average in 2016. Imports in April and May surged to more than 180,000 barrels a day on average, China customs data show.
The shift has been greeted with enthusiasm by American producers, who have been trying to pull the sector out of a three-year price slump that has sapped profits and jobs. Industry executives and local officials are now scrambling to retool ports in the Gulf of Mexico to accommodate the large vessels needed to ship vast quantities of crude around the globe.
While still far below the figure China pays its top suppliers -- Russia, Saudi Arabia and Angola -- the bill for U.S. oil could come in well above $1 billion this year, up from $150 million last year, according to customs data.
A confluence of factors has helped open the taps.
Falling production from China's own aging fields has forced the country to step up its hunt for new sources of crude. Imports are up 13% this year through May, compared with a year earlier, according to customs data.
The search came as America was opening oil exports in 2015 for the first time in four decades amid a boom in U.S. oil drilling, upending petroleum flows. Political uncertainty in the Middle East, including the decision last month by Saudi Arabia and other Arab nations to cut ties with Qatar, also has played a role.
"If there's opportunity to buy [oil] from somewhere else, we should," said Lin Boqiang, an energy expert at Xiamen University who has advised Beijing on oil policy. "The precondition is that it must be economical."
The economics have tilted in favor of the U.S. partly because of production limits put in place by the Organization of the Petroleum Exporting Countries, which have pushed up the price of benchmark Brent and Dubai oil. At the same time, rising shale production in the U.S. has pushed down the cost of American crude.
The new flow offers a bright spot in a U.S.-China relationship racked with challenges, from North Korea to hackers to the South China Sea. At industry conferences in Beijing and Singapore in March, executives from state-owned Chinese trader Unipec hailed a new golden age for energy trade between the two countries. Attendees said the overtly positive message appeared directed at Washington.
While much of the focus has been on expanding U.S. natural-gas exports to China, oil may prove another pillar in reducing the U.S. trade deficit with China -- a key objective of the Trump administration.
Unipec's parent, Sinopec Group, declined to comment on its U.S. imports.
The sudden rush of American oil to China could sputter out just as quickly as it began. U.S. crude will need to remain cheaper than rivals' offerings to make up for the higher cost and longer time frame of transporting oil from the Gulf Coast. It takes an estimated six weeks for oil to reach China from the Gulf, versus three weeks from the Middle East.
Because of the long haul to China, larger tankers are needed to boost economies of scale and bring down costs. That requires an upgrade of U.S. ports to allow the biggest tankers, which can ferry 2 million barrels of oil at a time, to load oil directly from the dock instead of transferring it from smaller vessels in the middle of the Gulf.
In May, Occidental Petroleum Corp. docked one such supertanker at its oil terminal along Corpus Christi Bay in Texas for the first time -- a prelude to what it hopes will become a routine event. "This will be a game changer" for U.S. exports, said Cynthia Walker, the company's senior vice president for midstream and marketing operations and development.
The Houston-based company says its Gulf Coast terminal accounts for 25% of the U.S. export market. Driven by the growing demand from Asia, total U.S. exports could hit 3 million barrels a day in the next few years, up from around 500,000 barrels a day last year, according to Occidental.
But American producers still face the challenge of convincing Chinese refiners that U.S. crude is suitable for their plants, many of which were built to process heavier grades of oil than the shale that is most widely available for export from the U.S. Analysts say one option could be persuading refiners to blend U.S. imports with heavier crude -- though such a trial-and-error process could take time to iron out.
Middle East oil giants aren't likely to easily surrender lucrative market share in China, either. Producers such as Saudi Aramco have been looking to reverse declines, for example by seeking investors from China in its planned initial public offering, essentially giving China a vested interest in the kingdom's future success.
On Wednesday, Saudi Arabia reduced the official selling price it charges customers in Asia. The prospect of a continued drop in Mideast prices poses the biggest threat to U.S. suppliers' China dream, as it could erode Beijing's desire to diversify.
"You don't get sustainable, exponential increases just because the government said so," said Michal Meidan, a China oil analyst at consulting firm Energy Aspects.
Write to Brian Spegele at firstname.lastname@example.org
(END) Dow Jones Newswires
July 06, 2017 08:45 ET (12:45 GMT)