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Geopolitics

Crude Oil as the new weapon in the U.S and China trade war?

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As the U.S.-China trade war continues to escalate, Beijing and its energy giants appear to be bracing for a worst-case scenario where the spat would drag on for years and possibly result in Chinese foreign oil supply stifled.

The idea that the world’s top oil importer could see some of its overseas crude supply blocked has always been an unthinkable notion, but now some analysts and Chinese industry executives suggest that China should prepare for the very worst of the worst, such as its oil supply impacted by a lengthy trade dispute.

Chinese oil industry executives said this past week that China’s oil industry must have a contingency plan in case the trade war takes another turn for the worse. https://finance.yahoo.com

Expectations for any sort of trade deal in the near-term are quickly dissipating, leaving investors to map out what else could get caught in the escalation between the U.S. and China. Here’s a new one to add to the list: Oil.

Higher oil prices though would be bad for China (as well as other emerging markets that import oil like India), further deteriorating its current account balance. “Could the China hawks in the U.S. administration also try to change Chinese behavior through a higher oil price? https://www.barrons.com

just today Saudi Arabia raises July crude oil prices to Asia. Saudi Aramco has raised its July price for its Arab Light grade for Asian customers by $0.60 a barrel versus June to a premium of $2.70 per barrel to the Oman/Dubai average, the state oil company said on Sunday. –kitco.com

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Geopolitics

China Holds the cards on Oil Prices

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Should China decide to defy the latest U.S. tariff threat by ramping up imports of Iranian crude oil in open defiance to the U.S. sanctions on Iran, oil prices could take a significant hit and plunge by as much as $20-$30 a barrel, Bank of America Merrill Lynch warned earlier this month.

in 2018 China import of crude oil: US$239.2 billion (20.2% of total crude oil imports)

in 2019 China’s crude oil imports in June averaged 9.63 million bpd, an increase of 1.7 percent from an average of 9.47 million bpd in imports in May, and a 15.2-percent increase from 8.36 million bpd in June last year, according to Reuters calculations in barrels from data in tons provided by the Chinese General Administration of Customs.

China is the world largest crude oil importer and any moves they make will impact global markets.

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Geopolitics

Mexico’s Crude Oil Problem

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Mexico’s economy has a high dependence on hydrocarbons. 89% of the country’s energy production is made from fossil fuels. It’s a large producer of oil, natural gas, and coal, however, Pemex is producing less and consumes more. This increases the vulnerability of Mexico’s economy. In 2004, Mexico produced 3.4 million barrels of oil on average per day and in 2018 production contracted to 1.8 million barrels per day, that is, the extraction of crude oil was reduced by half. In 2018 the lowest level of production of the last 38 years was reached and in 2019 the trend continues to fall.

Pemex production of natural gas has also been reduced consistently since 2014, which has increased Mexico’s dependence on gas sold by the United States, as this is one of the least expensive and cleanest fossil inputs to generate electricity. Mexico needs to increase its oil production, but it won’t be an easy task because it requires access to wells with a depth greater than 500 meters, and Pemex only has experience in drilling wells with a depth of up to 100 meters.

One of the biggest Problems Mexico faces is the current need for Pemex to import refined fuels more and more, This is the reason AMLO wants to build a refinery so as not to be dependent on a foreign country for its energy needs. Yet, Mexico’s elite is against this, A Government investigation of those against the plan has not been done, as to see if they benefit from keeping Mexico dependent on foreign companies. If that wasn’t enough American rating agency’s are also against Mexico’s move of Energy independence.

Trying to find a balance of investing in infrastructure and exploration is going to be Mexico’s biggest challenge.

Mexican President Andres Manuel Lopez Obrador said Thursday his government will reduce the federal budget burden taken on by state oil firm Petroleos Mexicanos (Pemex).

With the purpose of reducing the fiscal burden of Petróleos Mexicanos (Pemex)

The proposal includes gradual reductions in taxes of Shared Profit (DUC), which is 65%, to a lower rate of 54% for two years.

“These amounts are equivalent to 45.8% of the total accumulated debt maturities for the period 2019 to 2021,” the text highlights, and represents 61.8% of Pemex’s entire annual investment.

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