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Beijing and Brussels ‘go head to head in fight for Mena oil and gas’

Chinese shoppers at a mall in Sanya, Hainan province, on January 25. Analysts expect China's economy to recover quickly after the lifting of Covid restrictions Reuters/Alessandro Diviggiano
Chinese shoppers at a mall in Sanya, Hainan province, on January 25. Analysts expect China's economy to recover quickly after the lifting of Covid restrictions
  • China’s reopening set to increase competition for supplies, say analysts
  • Bank of America forecasts Chinese oil demand at 700,000 barrels a day
  • Capex on oil has fallen in Europe and US, but not in the Middle East

The Middle East and North Africa will be one of the main beneficiaries of China’s decision to drop its zero-Covid policy, as Beijing competes with Europe for limited energy resources, according to analysts at Bank of America.

“From a macro-perspective, it’s very easy to be bullish on the Mena region,” said Jean-Michel Saliba, a director and economist at the bank, during a virtual roundtable on Thursday. 

“The region is quite positively exposed to developments like China reopening, which is one of the core reasons why we are so bullish on oil prices.” 

Bank of America forecasts that the five Mena countries that will benefit the most from China’s reopening are its largest oil suppliers: Iran, Oman, Iraq, Saudi Arabia and Qatar.

China’s GDP grew by 3.2 percent in 2022, according to the International Monetary Fund – one of the country’s weakest performances since 1980. This year GDP growth is forecast at 4.4 percent and the IMF says the economy’s recovery could be “very quick”.

Karen Kostanian, Bank of America’s head of Europe, the Middle East and Africa energy research, also said China’s re-engagement with the global economy after three years of Covid restrictions would lead to a further tightening of oil and gas markets. 

“We have factored China’s forecast oil demand indicators into our total demand numbers this year,” he said. 

“Out of the global total 1.8 million barrels per day that we have forecast, 700,000 barrels of them are Chinese. This is close to half of our estimated demand in 2023.

“Furthermore, the reopening of the Chinese economy means it will be competing for fairly limited LNG [liquified natural gas] flows – the current capacity growth in global LNG is not very significant.” 

If oil is tight, gas is tighter, the bank said, pointing out that TTF (Dutch title transfer facility) gas prices have been trading above the coal and fuel oil equivalent switching ranges since last summer, with the Ukraine war triggering the fourth EU gas spike in nine months. 

This will result in fierce competition between the EU and China in securing gas supplies, according to Kostanian. 

“Even without China competing, last year Europe was purchasing natural gas at three to four times the prices paid prior to the Russia-Ukraine conflict. Meanwhile, US LNG is currently being offered under long-term contracts at two to three times a higher price than that which Russia sold its gas to Europe for the past 10 years.” 

Ursula von der Leyen, president of the European Commission, and other EU leaders at a summit in Brussels on October 20, 2022. More bans on Russian oil products come into force on February 5. Picture: Aris Oikonomou / Hans Lucas
Ursula von der Leyen, president of the European Commission, and other EU leaders at a summit in Brussels on October 20, 2022. More bans on Russian oil products come into force on February 5. Picture: Aris Oikonomou / Hans Lucas

Europe tightens the screws on Russia

Bank of America’s research indicates that Europe currently imports around 35 percent of its diesel from Russia, down from 47 percent before the invasion of Ukraine last February.

On December 5 2022, EU sanctions against the Kremlin came into force, prohibiting the purchase, import or transfer of seaborne crude oil and certain petroleum products from Russia. Imports of other refined Russian petroleum products will be banned from February 5.

The bar on oil products is likely to have a bigger impact than the sanctions on seaborne oil – or the $60-per-barrel price cap on Russian oil that was set by the G7 last month.  

“At the very least, this will cause logistical disruptions which could lead to higher oil prices,” said Kostanian.

“We’re not sure where Europe is going to be importing its new source of diesel from because there is a diesel deficit globally. 

“China is lifting some of the restrictions on its diesel exports so that will probably help to plug one third to half of the gap. The remainder will probably be plugged by either domestic consumption or sourced from the Middle East. 

“In our view, it’s going to be much tougher on Europe than the crude ban.”   

Capital expenditure in oil

Another reason for Bank of America’s bullish outlook on the Middle East is that capital expenditure in the oil industry has plummeted. 

“The West is convinced that the energy transition is upon us,” Kostanian said.  

“Consequently, the European majors have refused to increase capex, and then we had the big drop in energy prices in 2020 during Covid. That wholly changed the attitude of investors towards US shale, whereby the industry stopped investing most of the money it generates and started returning it to its shareholders.” 

Mena oil producers take a different view, he said.

“The UAE believes the transition will take place closer to the 2040s or 2050s so the world will need energy in the meantime. That leaves us in the very interesting position whereby the only people that are seriously investing into oil production today are concentrated within Opec+.  

“The cheapest energy is located here in the Gulf so this region will be the last man standing from that perspective. However, the energy transition is not going to occur at $30 per barrel, as everybody thought a couple of years ago. It will probably occur at $80 per barrel, which is obviously going to massively benefit the region for years to come.”

Kostanian added: “Opec+ controls about 40 percent of the global oil production but, most importantly, it controls about 95 percent of the spare capacity. 

“All the Gulf countries have very ambitious development plans and certainly would want to keep oil prices at levels which would enable them to implement those plans.” 

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