Back in May, we noted that for the first time in history, Russia overtook Saudi Arabia as the number one supplier of crude to China.
The implications of that should be clear, but in case they aren’t, allow us to elaborate.
First, Moscow is wrestling with crippling Western economic sanctions and building closer ties with Beijing is key to mitigating the pain. Part of the cooperation Russia seeks revolves around energy partnerships and while the Western media has endeavored to play down the arrangements (some of which have admittedly been beset with delays), the interest is there on both sides which means sooner or later, the deals will likely get done.
From a geopolitical perspective (and as regular readers are acutely aware, geopolitics and energy are inextricably linked at almost every turn), there’s a degree to which the shift is symbolic. That is, we don’t think we’re reading too much into it when we draw a connection between Russia’s usurpation of the Saudis on China’s crude suppliers list and the fact that Beijing and Moscow have voted with each other on the Security Council as it relates to Syria, where Riyadh’s interests are sharply at odds with The Kremlin’s.
Meanwhile, the Saudis are struggling to cope with the plunge in crude prices that they themselves engineered (they “Plaxico’d” themselves, as we’re fond of saying).
The proxy war in Yemen along with the cost of maintaining the everyday Saudi’s lifestyle doesn’t mix well with plunging oil as is abundantly clear from the following which shows that Riyadh is now facing a deficit on both the current and fiscal accounts.
And while Beijing’s demand for crude seems to be supported by a desire to stockpile while prices are low (see the rather strange price action on the Dubai spot market), the worry is that if China’s economy continues to decelerate, the Saudis will need to make up the slack somewhere else, and that’s led directly to Riyadh’s attempt to muscle in on Russia’s Eastern European customers.
If the Saudis were to continue to lose market share in China, that dynamic would be amplified.
Well don’t look now, but for the second time this year, Russia has surpassed Saudi Arabia as the top crude supplier to China. Here’s Bloomberg:
Russia beat Saudi Arabia to become the biggest seller of crude to China for the second time this year in the race to supply the world’s biggest energy consumer.
Asia’s largest economy bought a record 4.04 million metric tons of crude from Russia, or about 988,000 barrels a day, in September. That’s 42 percent more than a year earlier and 31 percent higher than in August, according to data from the General Administration of Customs in Beijing on Wednesday. Oman was the third-biggest supplier, behind Saudi Arabia, while Angola slipped to fourth place from second in the previous month.
China, the world’s second-biggest oil user, is buying near record amounts of crude from overseas as it seeks to take advantage of a plunge in prices to boost its stockpiles. The International Energy Agency estimates the nation will be responsible for more than a quarter of global consumption growth next year, making it a key battleground for producers seeking to defend market share amid a worldwide oversupply.
“The biggest battle to supply oil to China is between Russia and Saudi,” Gao Jian, an analyst at SCI International, a Shandong-based energy consultant, said by phone. “Russia is gaining momentum with its pipeline and buying interest for its crude from teapot refineries.”
A direct pipeline to northern China has boosted exports of East Siberia-Pacific Ocean crude. Seaborne shipments were also spurred by the proximity of the Kozmino port in Russia’s east to the Asian nation, while new rules allowing small independent refineries known as teapots to buy imported supplies have also helped sales.
But perhaps the most important thing to remember when considering all of the above is that from the start of 2015, Gazprom (which is Russia's third-largest producer) begin settling all crude sales to China in renminbi.
In other words, September's data on Chinese crude imports means the dreaded petroyuan is indeed proliferating...