Oil keeps Russia and China close, but analysts warn it won’t last

May 21, 2024, 11:32 AM

The presidents of China and Russia, Xi Jinping and Vladimir Putin, held talks in Beijing last week

Russia’s crude is cheaper than Riyadh’s
Saudi sales to China set to drop again
Likely to increase in long term, say experts

Russia was China’s biggest oil supplier once again in April, according to official figures, staying ahead of Saudi Arabia thanks to its cheaper crude.

However, crude flows from Riyadh to Beijing are expected to increase as the kingdom strengthens its presence in the Chinese energy sector, analysts have told AGBI.

Russia’s crude oil exports to China were up 30 percent year on year in April, according to data from Beijing’s General Administration of Customs. Supplies from Saudi Arabia were down 25 percent over the same period.

China, the world’s largest crude oil buyer, imported 2.25 million barrels per day (bpd) from Russia in April.

It took 1.54 million bpd from Saudi Arabia in last month, discouraged by the higher official selling price (OSP).

In April the kingdom raised the OSP for its flagship Arab Light to Asia to $1.70 a barrel over the Oman/Dubai average, up from the previous premium of $1.50.

Russia’s crude, shunned by many international buyers after the invasion of Ukraine in 2022, is being transported to China via pipelines under long-term contracts – and by a shadow fleet defying Western sanctions.

Mukesh Sahdev, head of downstream and oil trading analysis at consultancy Rystad Energy, said the average crude cost for China imports was $3 to $4 per barrel lower than the Dubai benchmark.

“That means Russian discounts are higher than that to drive the average down,” Sahdev said.

“China is taking the best advantage of cheaper Russian oil, to be ready for crude demand growth ahead, while anticipating lower flows from Opec cuts and an increasing check on leakage of sanctioned barrels.”

Riyadh has extended its voluntary output cut of 1 million bpd until the end of June, and is producing around 9 million bpd. Opec+ members are scheduled to meet on June 1 to discuss future policy.

Tanks of Russian crude oil at a pipeline terminal station in China. Putin says Russia could add an oil supply to its planned Mongolia gas pipeline

China’s crude imports reached a record 11.3 million bpd last year, according to the US Energy Information Administration.

Chinese refiners have increased their purchases of price-competitive supplies from other Middle Eastern countries, including the UAE, Iraq and Iran. Angola and Brazil have also become increasingly important suppliers.

Matt Stanley, energy expert at the commodity data supplier Kpler, told AGBI: “Beijing encourages Chinese firms to diversify their crude supply, driven by the government's perception of an increasingly hostile international environment and heightened energy insecurity amid escalating geopolitical tensions in the Middle East and the South China Sea.”

Kpler estimates that China will also take around 10 percent less Saudi crude in June than in May.

However, Stanley said, Saudi Arabia is likely to increase its crude exports to China in the long term, as its investments in the Chinese oil refining industry grow.

State energy giant Saudi Aramco has set sights on a number of private refining complexes, securing deals for oil supplies for decades.“Chinese private refiners will have to accept higher-priced crude oil and might lose access to cheaper supplies,” Stanley said.

China remained Saudi Arabia’s top market, followed by South Korea and Japan.

The close ties between Russia and China were on display last week as President Vladimir Putin visited his Chinese counterpart, Xi Jinping, in Beijing.

The two leaders, who declared in 2022 that their relationship had "no limits", signed a strategic partnership during the visit.

Putin said on Friday that Russia could add an oil pipeline to its planned gas pipeline, the 2,600km long Power Siberia 2, to be built via Mongolia.

Bilateral trade rose by more than a quarter last year to a record $240 billion.

Analysts believe lax enforcement of US sanctions has aided imports of Russian oil to China, as the Biden administration does not want oil prices to rise. However, this could change after the US presidential election in November.