An interesting development has overtaken the energy world. Russia is now China’s topmost crude oil supplier. In the process, a sanctioned Moscow has elbowed Riyadh from the slot of top crude supplier to Beijing.

Once upon a time, not too long ago, the United States was the topmost destination for crude from across the world. Courtesy of the shale revolution, it is no more. Now, it is China. Last year, China’s overall crude imports rose to a record 564 million metric tonnes, equivalent to 11.28m barrels per day (bpd).

But Beijing’s changing supplier mix is resulting in some raised eyebrows. Data from Chinese customs indicates that Russia delivered an unprecedented 107m metric tonnes of crude oil to China in 2023, almost a quarter more than in 2022. This is equivalent to an impressive 2.14m bpd, far exceeding supplies from other major oil exporters, including Saudi Arabia. It is the first time Russia has emerged as Russia’s top crude supplier since 2018.

The shift in Chinese buying patterns marks a decline in imports from Saudi Arabia — China’s top supplier in previous years. Chinese crude oil imports from Saudi Arabia registered a drop of 1.8pc to 85.96 million tonnes during 2023 as compared to the year before.

The shift in Chinese buying patterns marks a decline in imports from Saudi Arabia towards Russia

Shunned by many international buyers following Western sanctions, Russian crude oil is traded at a significant discount. This cheap and discounted crude from Russia appeared to be the major attraction behind the Chinese shift.

The Russian effort to boost sales in China and the broader Asian market should also be understood in the context of Western sanctions on Russian crude trade, resulting in its reduced presence in European markets. Its European market share has shrunk to 4pc-5pc from the 40-45pc it held before the sanctions.

With the US no longer a major crude market, most crude oil producers are now vying for a larger share of the growing Asian crude markets, especially China. And Saudi Arabia is no exception.

To counter the discounted crude sales by Russia, early this month, Saudi Arabia reduced the February official selling price (OSP) of its flagship Arab Light crude to Asia to the lowest level in 27 months.

Other strategic measures are also getting in place. Saudi state giant Aramco is looking to seal more downstream deals in Asia, Mohammed Al Qahtani, the Downstream President of Saudi Aramco, told Bloomberg in an interview recently. Aramco wants to grow by acquiring and expanding already operational projects, he added.

Following its strategy, in mid-December, it was announced that Saudi Aramco had signed an agreement to acquire a 40pc equity stake in Gas & Oil Pakistan Ltd (GO), a diversified downstream fuels, lubricants, and convenience store operator. GO is Pakistan’s largest retail and storage company.

Although the much talked about Pak-Saudi joint venture refinery project in Pakistan doesn’t seem to be moving ahead rapidly, this acquisition is Aramco’s first entry into the Pakistani fuels retail market.

“Our second planned retail acquisition this year aligns with Aramco’s downstream expansion strategy, with a clear path ahead for growing an integrated refining, marketing, lubricants, trading and chemicals portfolio worldwide,” Aramco’s Downstream President Mohammed Y. Al Qahtani said in an earlier statement.

Saudi Aramco is also looking to bolster further its downstream presence in the world’s top crude oil importer, China, Oilprice.com quoted Al-Qahtani as emphasising. The long-term prospects on the Chinese market are favourable for Saudi Aramco, which is looking to expand its downstream business in China further and lock in future-term oil supply contracts with the top global oil importer.

Last year, Saudi Aramco announced two major refinery and petrochemical deals in China, which not only give the world’s largest oil firm a share of the Chinese downstream market but also an additional export outlet for around 690,000 bpd of Saudi crude to China.

Does all this mean a battle for market share is heating up between Moscow and Riyadh? As per a Reuters report, the February price cut by Riyadh raised some concerns about the strength of the markets and led international benchmark Brent crude futures to drop by 3pc on Jan 8.

The price adjustment, though, revived memories of Saudi policy shifts in March 2020 and November 2014. Desperate to defend its market share, the kingdom then opted to begin a price war. That resulted in crude prices going abysmally low.

Yet, most analysts are of the view that the price cut this time brought the price of Saudi crude into line with that of other producers. Saudi Arabia increased the price of its crude to Asia for five straight months till November 2023. That policy has now been reversed.

Several factors are in play. Despite weakening demand and Opec output cuts, the supply of crude oil has been on the rise. Output from non-Opec countries such as Brazil and the United States has undermined the impact of Opec+ production cuts.

Market dynamics have changed. And Saudi Arabia is simply tuning in to the dictates of the market — nothing more.

Published in Dawn, The Business and Finance Weekly, January 29th, 2024

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