Congress to Limit U.S. Oil Exports to China: What Traders Need to Know

• U.S. Congress considering two pieces of legislation to limit oil exports to China
• The first bill would bar oil released from the Strategic Petroleum Reserve (SPR) from being sold to China
• The second bill would prohibit the export of crude and refined oil to the Asian country

The United States Congress is currently considering two pieces of legislation to limit U.S. oil exports to China.

The first bill, which was passed by the House of Representatives in January, aims to bar oil released from the Strategic Petroleum Reserve (SPR) from being sold to China.

The second bill, called the “China Oil Export Prohibition Act of 2023,” has been introduced to the Senate and would prohibit the export of crude oil, refined oil, and certain petroleum products to China. This bill has not yet come up for a vote in the Senate.

Traders should be aware of the potential market effects of this legislation because the pressure is mounting on U.S. lawmakers to take some action against China, particularly in response to the Chinese spy balloon shot down over the U.S. in February.

The first bill, impacting SPR sales, would not have much impact on the market because further SPR sales are unlikely at this point. Unipec, the trading arm of Chinese oil giant Sinopec Shanghai Petrochemical (OTC:SHIIY), did buy 950,000 barrels of oil from the SPR in July 2022.

This represented about 1/5 of all foreign purchases of U.S. SPR oil that were released last year. According to Rapidan Energy, the bill banning China from purchasing U.S. oil from the SPR is likely to pass the Senate by unanimous consent.

Traders should be aware that if this happens, the media will try to portray the legislation as more impactful than it actually will be, so there may be some initial reaction by the market, but in reality, there should be no actual impact.

The second bill, which is designed to severely limit—but not entirely ban—U.S. oil exports to China, would have a greater impact on the market. In 2021, China accounted for about 7% of the U.S. petroleum export market (crude oil and products combined).

It was the third largest customer, behind Mexico and Canada. In 2021, China imported 9% of all U.S. crude oil exports, making it the 5th largest customer. Notably, the bill to limit U.S. petroleum sales to China provides an exemption for NGLs, which account for about one-third to one-half of China’s imports.

This bill is unlikely to pass the Senate or the House because it would negatively impact U.S. oil producers and refiners. China isn’t the most important market for U.S. crude oil or petroleum products, but it is a significant market.

Closing off a market for U.S. crude oil and refined products would likely cause the price of WTI to drop slightly. While this might be good for U.S. consumers, it could cause problems for refiners, who could find themselves with a glut of products intended for China that the U.S. market can’t absorb.

Eventually, U.S. crude and petroleum products intended for China would find other global outlets, but the adjustment period would hurt oil producers and refiners.

From China’s standpoint, a ban on importing oil directly from the United States would not be especially significant. In 2021, U.S. oil accounted for just 2.3% of China’s oil imports (the 11th largest source).

China tends to increase its imports from the United States when the spread between WTI and Brent widens, making U.S. oil relatively cheaper, but it never imports enough oil from the U.S. that a ban would cause hardship to China.

In addition, traders should be aware that any potential bans on oil sales to China would only impact direct U.S.-to-China sales. U.S. crude oil and petroleum products could still reach China through furtive ship-to-ship transfers through third-party trading companies. If China really wants U.S. petroleum, it will find a way to get it.

Disclosure: The author does not own any of the securities mentioned in this article.