Russia and Saudi Arabia Engage in a Rivalry over China’s Oil Market Share

China’s oil demand is rising with the reopening from Covid restrictions after nearly three years. The initial demand trend suggests a reopening in fits and starts, but analysts say that it will be China that will account for half of this year’s global oil demand growth, with total world oil demand reaching a record.

And while China’s oil demand is set to rebound, the leaders of the OPEC+ group, Saudi Arabia and Russia, will be competing to meet the growing demand in the world’s largest crude oil importer.

Saudi Arabia is able to sell its crude oil under long-term agreements, which guarantees it a certain share of China’s market. But Russia, having pivoted to Asia for crude and fuel sales after the Western sanctions, is offering its oil at discounts and could attract more Chinese buyers who don’t abide by the G7 price caps.

The Saudis are signaling expectations of a strong rebound in China’s demand by unexpectedly raising their prices for Asia. But these prices cannot compete with discounted Russian barrels, and Chinese buyers may opt for requesting the minimum volumes from Saudi Arabia allowed under the long-term contracts OPEC’s top producer, Reuters’ Asia Commodities and Energy Columnist Clyde Russell argues.

Saudi Arabia this week surprised the oil market Saudi Aramco raised the official selling price (OSP), of its flagship crude oil going to Asia in March. Saudi Aramco lifted the price of its flagship Arab Light grade to Asia for March loadings by $0.20 per barrel to a premium of $2.00 a barrel over the Dubai/Oman average, the benchmark, off which Middle East’s oil is priced in Asia.

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The unexpected price hike was the first increase of Saudi oil prices in Asia since September. This likely reflected Saudi anticipations that Asia’s demand will rise in the second quarter.

It is not only Saudi Arabia that is optimistic about China’s oil demand recovery.

The reopening is putting upward pressure on global oil demand, and half of this year’s demand growth is set to come from the Chinese growth in consumption, the International Energy Agency (IEA) says.

In its Oil Market Report For January, global oil demand was expected to rise by 1.9million barrels per day (bpd), to record 101.7million bpd in 2023. Nearly half of the increase came from China after the lifting Covid restrictions.

“China will drive nearly half this global demand growth even as the shape and speed of its reopening remains uncertain,” the agency noted.

The EU ban on Russian oil products – in place from February 5 – could soon mean that “the well-supplied oil balance at the start of 2023 could quickly tighten however as western sanctions impact Russian exports,” the IEA said in its January report.

Russia’s exports to China, however, are soaring to an estimated 2.03 million barrels per day (bpd) in January, up from 1.52 million bpd in December, per Refinitiv Oil Research data cited by Reuters’ Russell. For comparison, Chinese crude imports from Saudi Arabia averaged 1.77 millions bpd in January.

According to an Energy Aspects report this week, PetroChina and CNOOC have purchased more Russian crude oil. They could increase their imports to meet the demand for cheaper oil. Bloomberg. Bloomberg points out that Russia could take 2.5 million bpd if China fills its reserves.

Russia was also already diverted most of its fuel oil Vacuum gasoil (VGO), and vacuum gasoil (VGO), were exported to Asia and Middle East before the EU embargo of Russian petroleum products became effective on February 5. Independent Chinese refiners are now available big buyers of Russian fuel oil Reuters is told by trade sources that gasoline and diesel could be produced from the Russian product because it is cheaper than the domestic product.

With China’s reopening, Saudi Arabia will face stiffer competition from its OPEC+ partner, Russia, for market share in the world’s top crude oil importer.

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