Saudi Arabia has responded to the reimposition of U.S. sanctions on Iranian oil sales by directing more oil to China and less to the United States. According to U.S. Energy Information Administration (EIA) data, U.S. imports from Saudi Arabia have fallen nearly 32% in two years, from a total of 813,000 barrels a day in 2017 to 556,000 barrels last week. In the past year, imports have dropped by 55% from 1.24 million barrels a day in the first week of August 2018.

CNBC on Thursday cited TankerTrackers.com, which reported that the Saudis exported 1.8 million barrels a day to China in July compared to 262,053 barrels a day to the United States in the same month, a drop of 62%. TankerTrackers.com uses satellite imagery and automatic ship identification systems to track the world’s fleet of oil tankers. U.S. EIA data for the final week in July showed imports down just over 50% on a rolling four-week average, from 919,000 barrels a day last year to 455,000 barrels a day this year.

Saudi Aramco, the kingdom’s state-owned oil company, owns the 607,000-barrel a day Motiva refinery in Port Arthur, Texas, and virtually all Saudi exports are directed to that facility. The lower shipments to the United States can be easily made up by domestic U.S. crude, and Aramco can use the barrels that would have gone to Motiva to cement relationships with China (and add market share) by shipping more crude east.

This would all be sort of everyday news except that there is evidence that Iran continues to send oil to China in significant quantities. In April, Reuters reported that Refinitiv Oil Research estimated that China’s imports from Iran rose from 565,000 barrels a day in March to 754,000 barrels a day.

Because China’s oil market lacks the transparency of the U.S. market, it’s hard to know exactly what the country is doing with all that oil, but the Chinese appear to be dodging U.S. sanctions on purchasing oil from Iran by offloading at least a portion of it into bonded storage tanks in China. The oil has not been officially imported, customs duties have not been paid and, technically, China hasn’t breached U.S. sanctions because the Iranian crude is still in transit.

According to a July 21 report at Bloomberg, between January and May of this year, China received shipments of about 12 million tons of Iranian crude (one metric ton is equal to about 7.33 barrels, indicating that one short ton is equal to about 6.6 barrels) and about 10 million tons cleared customs. The other 2 million tons likely flowed into bonded storage.

If Iran were not able to park its oil in bonded Chinese storage, it would be forced to fill up its national tanker fleet and sail the oil around in circles in the Persian Gulf until the sanctions were relaxed. At the same time, it could fill up its onshore storage tanks. The country did both in the period between 2012 and 2016, when U.S. sanctions related to Iran’s nuclear program were being enforced.

What if Iran is indeed parking oil technically in transit in China? How does that affect the global market? The answer is, “Not much. Yet.” That is, at least not until the Chinese begin to buy the stored oil and sell it to the country’s own refiners, driving down the price of crude as the excess hits the market. And if the U.S.-China trade war heats up, China could begin openly buying crude from Iran, pushing U.S. crude prices down even further than they are now. The Trump administration could do little except throw a tantrum because China has shown it won’t be bullied into making decisions against what it sees as its own interests.

The U.S.-China-Saudi Arabia-Iran nexus does not end well for the United States, no matter what happens. The Chinese stand to gain the most with a boost to the oil stocks at low prices, while the Saudis and Iranians both gain a little. Once again we see how trade wars are good and easy to win.

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