How China may frustrate Russia/Saudi Arabia rally

While countries like Nigeria and other oil producing countries including Saudi Arabia and Russia are putting strategies in place to move crude oil price north, a major crude oil consumer, China, may be working towards ensuring such strategies do not materialise.

China, the world’s largest crude oil consumer, has been increasing oil imports and feasting on the low crude oil prices. Chinese oil imports have increased to 32.85 million tons in August, the second highest figure after the record 33.19 million tons import figures of December 2015. It’s a 7 percent increase over the same period last year, and a 6 percent increase over July. Currently, the Asian giant imports 66 percent of its crude oil requirements.

“Chinese oil majors are no longer under orders to increase domestic production, as they were doing so at a loss,” said Adam Ritchie, Executive General Manager for supply at Caltex Australia Ltd. “China’s change to let economics decide between imports and domestic production is a big change,” reports Bloomberg.

Russia and Saudi Arabia, the two largest suppliers, have been battling it out to increase their market share in China. While Russia has increased its market share in China from 12.6 percent last year to 13.6 per cent this year, Saudi’s have seen their share dip from 15.1 per cent to 14 percent during the same period.

“There’s a market-share battle going on mainly among the Middle East producers and Russia,” Olivier Jakob, Managing Director of Petromatrix, said by phone from Zug, Switzerland. “Rivals are making a big push into China,” reports Bloomberg.

An agreement between both the competing producer nations reduces the bargaining power of the Chinese refiners, who had started to choose the spot sales offered by Russia against the long-term contracts policy of Saudi Arabia.

Nevertheless, the Chinese can breathe easy, because like many other experts globally, even the Chinese analysts are not confident that the deal between Saudi Arabia and Russia will result in any substantive action.

“It will be very difficult to implement this agreement, as the volume for each exporter country is different. Many countries – producers of oil and gas rely on exports, so they are unlikely to agree to the terms of the agreement,” a senior consultant for Sinopec, Yang Qixi said.

However, Saudi Arabia’s Minister of Energy, Industry and Mineral Resources, Khalid Al-Falih, is optimistic that other large oil producers will join forces with Russia and Saudi Arabia to take appropriate steps to stabilize the markets.

“We are optimistic that Algiers meeting will provide a forum, and pre-Algiers that consultations which will take place bilaterally and in groups will bring us to Algiers with some sort of coordinated decisions. But the two countries agree that even if there is no consensus, we will be willing to take joint action when necessary,” said Al-Falih.

Along with this, China and the U.S. announced their formal joining of the Paris agreement. China has to wean the economy away from the use of fossil fuels if it expects to achieve its target of carbon emissions by 2030. In order to realize this shift, China will have to make an initial investment of $5.2 trillion in lean energy technologies, which will lead to $8.3 trillion in savings by 2050, according to a study, Reinventing fire: China.

Hence, as a major importer of oil, China will want the recently announced cooperation between Saudi Arabia and Russia to fail so prices will remain low. If that happens, China can postpone investments into fossil fuels and divert that money towards clean technology, which will help it to reduce its carbon footprint.

Russian President Vladimir Putin is keen to reach an agreement with OPEC to freeze oil production in hopes of prices regaining strength. With the U.S. shale boom supplying most of North America, OPEC has increased production to maintain their market share. This has caused massive price reductions, putting many countries at a loss. Two years ago crude oil was priced at around $100/barrel, but in today’s inundated market it rests below $50.

Iran’s sanctions were recently lifted, allowing it to reenter the oil market and resume production. World leaders agree that Iran needs to continue growth and shouldn’t be included in this production freeze. To remain at the crippled production level would constrict Iran’s GDP growth, which is now being forecasted as high as six per cent.

Back in April however, at a meeting in Doha, Prince bin Salman of Saudi Arabia complicated talks by expressing a desire to include Iran in the freeze. This halted the deal and more talks will be necessary before moving forward. Saudi Arabia sees Iran as a competitor. If Iran is able to restore production to a level that is similar to that of before sanctions were imposed, Saudi Arabia could stand to lose some of its market share. Saudi Arabia produces over 10 million barrels/day and continues to steadily grow.