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The Future of Oil Markets: What Saudi Arabia's China Bet Means for Traders

Published 03/30/2023, 06:24 AM
Updated 07/09/2023, 06:31 AM
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  • Western Europe's ban on Russian oil led to changes in the market, with Russia now top oil supplier to India and China
  • Saudi Arabia increased exports to Europe but still bets on China for future demand
  • Aramco's deals tie up more Saudi oil in long-term contracts in Asia, reducing U.S. influence
  • Western Europe’s ban on seaborne imports of Russian oil has reorganized the oil market in significant ways. For example, Russia opened a new market in India and quickly rose to become India’s top oil supplier. Russia was already China’s second-largest crude oil supplier, but in January and February rose to overtake Saudi Arabia to become China’s largest crude oil supplier. But there are signs that Russian oil supremacy in Asia may not be designed to last.

    Saudi Arabia has increased its oil and diesel exports to Europe, but recent developments in the Saudi-Sino relationship make it clear that Saudi Arabia is still betting on China as its most important source of future demand.

    There are several potential implications of this for traders. The first is that Aramco (TADAWUL:2222) clearly does not see Europe as a reliable customer in the medium to long term. Europe may return to buying Russian crude oil due to ease of transport and has recently passed laws designed to make it impossible for carmakers to sell cars that run on gasoline or diesel.

    The second is that traders should expect China’s industrial demand for crude oil to increase in the coming months and years. Although much of the focus for short-term demand has been on China’s consumers, industrial demand should be expected to grow in the medium to long term.

    Earlier this week, Saudi Aramco announced several new oil deals with Chinese energy companies that would guarantee a market for an additional 690,000 bpd of Saudi crude oil. Aramco acquired a 10% stake in Rongsheng Petrochemical Co Ltd (SZ:002493), and the deal contains a provision that Aramco will supply 480,000 bpd of crude oil to Zhejiang Petrochemical Corp (SZ:002648) for the next 20 years.

    In addition, Aramco and a JV it is involved in with two Chinese companies, HAPCO, decided to develop a petrochemical complex in northeast China to which Aramco will supply 210,000 bpd of crude oil. For reference, in January, Aramco exported about 1.2 million bpd of crude oil to China, according to TankerTankers.com. These deals represent a significant increase in oil exports to China, although the petrochemical refinery is not expected to be completed until 2026.

    Geopolitically, the implications of this are important for the U.S. With more Saudi oil now tied up in long-term contracts in Asia, U.S. desires vis-a-vis oil prices and oil supply will be even less important.

    Saudi Arabia, and by extension OPEC, will act in its best interests, and those best interests are now ever more tied to China. Whereas maintaining a good exporter-importer relationship between Saudi Arabia and the U.S. used to be very important, Saudi Arabia’s relationship as an oil supplier to China is now more important.

    We should expect OPEC and Saudi Arabia to be ever more attuned to economic and diplomatic signals from China as opposed to the United States.

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    Disclosure: The author currently does not own any of the securities mentioned in this article.

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