Russia is preparing for an oil war with Saudi Arabia over the Chinese market

The reorientation of Russian oil supplies from Europe to Asia continues. Back in the spring, Russia became the main exporter of “black gold” to the Middle Kingdom. True, there are risks that do not allow our raw material exports to gain a foothold in new regions. We are talking about fierce competition in the East with Arab producers, who continue to provide raw materials to the EU and have already agreed on long-term supplies to China, taking away potential customers from Russian companies. To maintain stable exports, domestic oil suppliers again have to sell hydrocarbons at a significant discount.

The gradual recovery of the national economy and industry after pandemic restrictions requires China to increase foreign purchases of hydrocarbons. Beijing already imports about 11 million barrels of oil per day, of which about 2 million “barrels” come from our country. According to Chinese customs, over the nine months of this year, purchases of Russian oil increased by almost a quarter compared to last year, approaching 80 million tons.

At the same time, the Chinese are not inclined to put all their eggs in one basket. They are trying to diversify imports of energy resources so as not to become hostages to a single producer and are counting on some cost preferences from producing states. In particular, at the end of September, companies from Beijing managed to purchase a large batch of “black gold” from Iranian suppliers under sanctions. The cost of the batch was only $24 per barrel, and the rest (oil prices are now at $90) was taken up by transport and fiscal costs.

According to Bloomberg, the Chinese market has become a “fierce battleground” for leading energy producing countries – in particular, Russia and Saudi Arabia. Last year, the Saudis became the leaders in the supply of black gold to China – about 87.5 million tons. This year they are still lagging behind Russia in terms of export volumes. But in the spring, the national corporation Saudi Aramco agreed to acquire a 10% stake in the Chinese processing holding Rongsheng Petrochemical. According to analysts, this deal signals Riyadh’s confidence in the sustainability of energy demand in the Middle Kingdom, which is expected to increase by more than 5% in 2023.

Against the backdrop of high oil prices, stock market players and industry experts continue to wonder who Beijing will bet on: Middle Eastern producers, who are mostly not bound by sanctions; or on Russian suppliers, whose products are “toxic” from the Western point of view, but until recently were offered at discounts. Experts told MK about the peculiarities of the unfolding “oil war” that Russia is waging for the Chinese market.

– Russia relies on the Asian market in its foreign oil supplies. How justified is this?

Vladimir CHERNOV, analyst at Freedom Finance Global:

– This is a necessary measure. Because of the sanctions announced against us, it is now much more profitable for Russia to supply oil to Asian countries. Previously, the advantage of exporting energy resources to Europe was due to relatively cheap transport services and the close geographical location of importers. Now, thanks to the reduction in the discount on Russian “black gold,” exporting hydrocarbons to Asian trading platforms is no less convenient and profitable than to Western markets in the past. The East is increasing the demand for petroleum products at a faster pace, so the bet on this direction is completely justified.

Dmitry ALEXANDROV, Head of Analytical Research Department, IVA Partners:

– And earlier, Russian companies gradually expanded their course towards the eastern direction, intending not so much to diversify as to balance the geography of supplies. Russian oil has its own physical and chemical characteristics, which is important for Asian refineries. Our exporters have the ability to sell both heavy and light, low-sulfur oil of various grades. In this sense, competition with Middle Eastern suppliers in itself is not terrible. More important is the connection with the overall dynamics of global and regional demand and production volumes in other regions. Not only in OPEC+ countries. Of great importance is the unification and improvement of the system of connecting Russian export pipelines with the largest fields – from the western to the eastern borders.

Vladislav ANTONOV, financial analyst at BitRiver:

– Russia’s focus on the Asian market in energy exports looks justified. Eastern countries, primarily China and India, are demonstrating stable economic growth and increasing demand for energy. Russia is a reliable supplier of energy resources, and therefore is able to provide stable supplies of oil and gas to these regions. Geographic proximity and the presence of pipeline capacities make Russia an attractive partner for Asian importers.

– Will Russia be able to displace the former leaders in oil supplies in this region – especially Saudi Arabia? What can our country offer Asian buyers as an advantage of its product – just regular discounts?

ANTONOV:

– Competition in the Asian market is intensifying. Demand is growing, but there is still room for all major exporters. Russia can offer Asian buyers stable supply volumes, pricing flexibility and logistics reliability. Although price concessions are not beneficial to Russia, the main thing is to provide buyers with guarantees of long-term cooperation. Russian companies are actively increasing investments in logistics infrastructure to ensure supplies to Asia. Let’s hope that this scheme will not be disrupted.

ALEXANDROV:

– The likelihood of fierce price competition with Middle Eastern exporters is still low. Most likely, producing countries will act together, coordinating their decisions within OPEC+, thereby regulating total supply volumes and maintaining a price level that is satisfactory for everyone. Asian importers are undoubtedly interested in diversifying their supply sources, which reduces interdependence and geopolitical risks between producers and consumers of raw materials. There are few incentives for oil exporters to engage in price fighting.

CHERNOV:

– Discounts on Russian export oil are decreasing. Against the background of the military conflict in the Middle East and the increasing risks of interruptions in the supply of energy resources from this region to world markets, the discount on our “black gold” in September decreased from 14.4% to 11.6%. However, in the process of fighting for consumers, it cannot be ruled out that discounts will have to be increased again, since it is the discount in the current geopolitical and foreign economic conditions that makes Russian oil more attractive.