China imported record volumes of crude oil in May, but despite the terms of the phase one trade deal with the United States requiring it to buy huge volumes of energy products, very few of the bumper shipments are expected to have been American. Instead, China’s “opportunistic buyers” went on a shopping spree for cut-price oil from the Middle East and Russia to bolster its national reserves, or to just turn a quick profit, even as US oil prices briefly turned negative for the first time in their history, analysts said. That means that almost halfway through 2020, China is falling further behind the deal’s “overly ambitious” purchasing targets for American energy products, including natural gas and oil, even as it continues to buy record volumes of pork and ratchets up shipments of politically expedient soybeans, crucial if US President Donald Trump is to win the farm state vote in November’s general election. As part of the trade deal, China has agreed to increase energy product purchases by US$52 billion over the next two years, which would average out to US$2.2 billion per month for 2020. A full breakdown of May’s imports released later this month is expected to show some US purchases, but nothing close to that target. Total China’s imports of all American goods fell by 13.5 per cent in May in value terms, despite the obligations of the phase one deal. For the first five months of 2020, China imported US$600 million worth of covered energy products against a target of US$10.5 billion, according to research from AB Bernstein, based on estimates of the geographical breakdown of May’s imports. “While energy prices have halved since the start of the year, on a price adjusted basis, US energy imports are still far lower than they should be under the agreement,” said Neil Beveridge, AB Bernstein’s managing director in Hong Kong. “The value of US energy exports is likely to decline to US$75 billion to US$80 billion this year [from US$100 billion in 2019], due to lower prices and lower production. This means that the US would need to send 65 per cent of its energy exports to China in 2021 to reach the [targets in the] agreement.” [The White House is] definitely annoyed and has pointed this out as one of the areas that China is doing the worst Phase one deal negotiator Sources on both sides of the deal do not expect this to happen. Industry figures thought the energy purchase target was doomed from the outset, given the sheer scale of the commitment coupled with Chinese refineries’ preference for heavy sour crude coming out of the Middle East, over light sweet American alternatives. But there is a sense that the desperately low energy imports are not enough to torpedo a deal which has come under increased scrutiny in recent weeks, as wider geopolitical tensions flared over Beijing’s move on Hong Kong and the subsequent US response. “[The White House is] definitely annoyed and has pointed this out as one of the areas that China is doing the worst”, said a member of Trump’s negotiating team for the phase one deal, who did not wish to be named. “But it doesn’t appear to be a massive priority in the scheme of things. Either missing the mark on the structural issues or agricultural purchases is what could tank this”. Another source, briefed on the talks, added that on energy, “Trump just wanted big numbers, and so they made the increase even bigger as they went along, but it wasn’t realistic to begin with”. What is the US-China trade war? How it started and what is inside the phase one deal Officials at the National Development and Reform Commission, China’s state planner, have also briefed sources that while China is expecting to buy more American energy products in the second half of the year, it is not viewed as a priority, nor do they expect to meet the target. Instead, China is happier to discuss farm goods, said Dan Wang, a China analyst at the Economist Intelligence Unit in Beijing, while importing energy from countries under its Belt and Road Initiative, its ally Russia and Middle Eastern nations. “Even if China was to meet its target on energy, the domestic oversupply would be a bigger issue, but there is a real demand for food products, which they are importing,” she added. But there remains some confusion at China’s reluctance to make major US energy purchases, at a time when it seemed politically and commercially expedient. There is this perennial fear that as the oil arrives in China, it will be imposed with additional duties Michal Meidan Chinese refiners are “stuck between a rock and a hard place”, said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, having been told earlier in the year that the deal would be a priority, only to see the relationship subsequently deteriorate over coronavirus and Hong Kong. “There is this perennial fear that as the oil arrives in China, it will be imposed with additional duties. So some of it might be going into storage somewhere globally just to wait and see how things go, because unless refiners have some kind of certainty from the government, then it’s hard for them to import,” she said, suggesting that a breakdown in superpower relations could lead to the resumption of tariffs that were taken off as part of the phase one deal. “If you buy 130,000 barrels or 350,000 barrels a day of crude oil, Trump’s not going to go out to the shale producers and say: ‘Look, what a great deal I got for you,’ in the way he would with the farmers in Iowa,” Meidan added, suggesting that energy does not carry the same electoral clout for Trump as farm goods. Erica Downs, an expert on China’s energy sector and geopolitics at Columbia University’s Centre on Global Energy Policy, said “many industry analysts were sceptical, right from the start”. Nonetheless, it could have been hoped that “the mere existence of the targets would nonetheless spur increased Chinese purchases of US energy”, Downs said. “Language in the phase one agreement allowed both countries a face-saving explanation if the targets weren’t met. For example, even before the agreement was signed, Chinese officials were stressing that purchases would be made according to market conditions,” she said, adding that there is “a recognition that the agricultural targets appear to be more important to President Trump and increases in this area would offset US concerns about China not meeting its energy targets”. Scott Lauermann, a spokesman for American Petroleum Institute, a Washington-based oil industry lobby group, urged the US “to continue to engage diplomatically with China and avoid an escalation in trade tensions, which could imperil our nation’s economic recovery and long-term energy security”.