Cheap and discounted crude from Russia appears to be the major attraction behind this shift
Freezing temperatures and geopolitical tensions weighed heavily on the global energy markets last week. Oil prices settled slightly lower on Friday yet recorded a weekly gain as Middle East tensions and oil output disruptions offset concerns about the Chinese and global economies.
Brent futures settled 54 cents lower at US$78.56 a barrel. U.S. West Texas Intermediate crude fell 67 cents to settle at US$73.41.
While China remains, the most sought-after customer to oil producers, interesting developments are overtaking the global energy dynamics. A sanctioned Russia, and not Saudi Arabia, is now the largest oil supplier to China.
Data from Chinese customs indicates that Russia delivered an unprecedented 107.02 million metric tons of crude oil to China in 2023. This is equivalent to an impressive 2.14 million barrels per day (bpd), far exceeding supplies from other major oil exporters, including Saudi Arabia. The shift was marked by a decline in imports from Saudi Arabia – China’s top supplier in previous years. As per the data, Chinese crude oil imports from Saudi Arabia dropped 1.8 percent to 85.96 million tons during the year.
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Cheap and discounted crude from Russia appeared to be the major attraction behind this shift. The Russian effort to boost its sales in China and the broader Asian market should be understood in the context of its reduced presence in European markets. Its European market share has shrunk to four to five percent, a significant drop from the 40 to 45 percent it held before the imposition of sanctions.
Saudi Arabia does not seem to be taking the growing exports from Russia to China lightly. On Jan. 7, Riyadh reduced the February official selling price (OSP) of its flagship Arab Light crude to Asia to the lowest level in 27 months. China and the wider Asian region have traditionally been the largest markets for Saudi crude oil.
According to Reuters, the price cut led to market concerns about regional and global demand and resulted in a drop of three percent in international benchmark Brent crude futures on Jan. 8.
Does this cut in prices indicate a new round of price wars? For some observers, the price adjustment brought back memories of Saudi policy changes in March 2020 and November 2014, when the kingdom decided to initiate a price war in an attempt to secure a larger share of the market. This caused market prices to plummet to extremely low levels.
Most, however, do not share this perspective. Informed sources insist that this recent price reduction has aligned the price of Saudi crude more closely with that of other producers. Saudi Arabia had been consistently raising the price of its crude for Asian markets for five consecutive months up to November 2023. That now seems to be changing.
“We do not see the recent cut (in Saudi prices) as indicative of such a looming shift, but instead largely keeping prices in line with other global grades that have reflected a softer oil market,” Reuters quoted Helima Croft of RBC Capital Markets as saying.
The Saudi price cut is not just a battle for market share.
Gary Ross, CEO of Black Gold Investors and a veteran OPEC watcher, says, “They needed to improve competitiveness and are still higher priced.”
Another OPEC watcher, who declined to be named because he was not authorized to speak publicly, said it was a mistake to see the price cut as indicative of a looming market share fight. “The prices are back to normal levels from being overpriced,” Reuters quoted him as saying.
Several factors seem to be in play. Despite weakening demand, the supply of crude oil has been on the rise. Output from non-OPEC countries such as Brazil and the United States has undermined the impact of production cuts by Saudi Arabia and its allies in the Organization of the Petroleum Exporting Countries.
Efforts to rein in output face hurdles. Saudi ally the United Arab Emirates ramped up exports of Abu Dhabi’s flagship Murban crude early this year, according to media reports. Increased output of other light sweet crude grades, including from fellow OPEC member Nigeria, as well as from the U.S., Brazil and Angola, is also adding to the woes of the crude markets.
Crude shipments from Iran, exempt from making OPEC output cuts, averaged one million barrels per day to Asia in December, treble the rate of the same month a year earlier, Kpler data show.
Market conditions have evolved, and Saudi Arabia is merely adjusting its approach to align with market demands. Nothing more.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
For interview requests, click here.
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