• As Riyadh’s push to boost prices falls flat, Moscow keeps gaining ground with world’s biggest buyer
  

Summer Said and Benoit Faucon, WSJ

DUBAI/LONDON
EnergiesNet.com 06 29 2023

Russia is on the cusp of overtaking Saudi Arabia as the biggest oil supplier to China, in a shift that shows the limits of the kingdom’s influence over global markets that have been turned upside down by the Ukraine war.

Since the beginning of the war, Saudi Arabia has been steadily losing market share in China—the world’s biggest energy market—thanks to Russia selling its oil at steep discounts. A production cut from Saudi Arabia earlier this month didn’t have the desired effect of boosting prices to compensate for the dip in demand. 

The chaos in Russia in recent days, in which the Wagner paramilitary group launched then halted an insurrection, thus far has had little impact on the country’s energy sector. But investors and analysts are watching the situation closely, among other things because of its potential for disrupting the delicate alliance between Russia and the Saudi-led Organization of the Petroleum Exporting Countries. 

The tug of war over China has been one of the persistent sources of tension. 

In April, Saudi Arabia’s crude exports to China were temporarily overtaken by Russia, only for Saudi Arabia to reclaim the top spot. Now the two are roughly even again, and analysts say all signs point to Russia pulling ahead—and then extending its lead in China in coming months. 

Shipments from Russia now account for 14% of Chinese supplies, up from 8.8% before the war, says the commodity-data provider Kpler. Saudi Arabia’s share fell to 14.5% in the three months to May.

The reversal has been even more dramatic in India, where Riyadh holds 13% of the market, compared with 20% before the war. Moscow now accounts for about 40% of India’s imports, up from 3% before the war, according to Kpler. 

Both China and India are ostensibly neutral in the conflict, saying they back a peace resolution. Yet the sales of oil to Asia are earning Russia billions in hard currency it needs to finance its war. 

Moscow also has boosted imports from China of technologies critical to its military effort including semiconductors and microchips. India is turning the cheap crude it gets from Moscow into premium-priced diesel sales to Europe—where it replaces banned Russian refined products.

Meanwhile, China is increasingly hoarding cheap Russian oil, insurance in case the economy kicks into gear and prices tick higher. Beijing added about 1.77 million barrels a day to its inventories in May, the most since July 2020, according to oil data-analytics firm Refinitiv Eikon.

The flood of cheap Russian oil has depressed global prices, which hurts Saudi Arabia’s ability to fund its economic program at home. The loss of market share, combined with the drift in prices, is a painful double whammy.

The kingdom’s surprise move earlier this month to slash an additional one million barrels a day of oil was supposed to jolt prices higher—as Saudi Arabia historically has been able to do. The cut, during an OPEC meeting, came hard on the heels of curbs by the same amount since September.

Instead, prices barely moved. Brent, the international oil contract, has remained at the same level, around $75 a barrel and way below $81, the price analysts say the kingdom needs to balance its budget.

“Cutting production is easy but you are giving up market share to other countries like Russia,” said Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank, adding that “it’s not easy to wrestle back your market.”

So far, Saudi Arabia’s plan appears to be a failure, he said, but noted that a boost in Chinese demand in the third quarter—predicted by many forecasters—likely would push prices higher and vindicate the move to curb output.

Some OPEC delegates have argued that the Federal Reserve has more power over the oil-futures markets than the Saudi-led bloc. The Fed’s rate increases have strengthened the dollar, making commodities denominated in the U.S. currency more expensive for holders of other currencies and weighing on prices.

While experts say Russia’s status as a permanent discount seller could become a long-term drag on international oil prices, they also point out that Moscow’s output is set to decline sharply in the coming years as it gets starved of investment and Western technologies. 

Saudi Arabia’s decision to cut production was shortly followed by an increase in the official selling prices for crude to be shipped in July, despite refiners in Asia expecting prices to be lowered. The move, which forces Asian refiners to buy less Saudi crude and look for cheaper competing grades, is aimed at providing the oil markets with a strong floor for oil prices to go through, the people said. 

Yet, future contracts for shipments a year from now still show a decline to $72 a barrel from $74, a trend known in oil markets as “backwardation.

Some officials have argued that this strategy will likely fail as the kingdom doesn’t have the power to control futures markets that are now mostly controlled by algorithms. They argued that China has in the past either cut imports and used up some of its stockpiles when oil prices were too high and could do the same now.  

Before it was largely banned from the European Union, the Urals grade, Russia’s top most popular type of crude, was generally delivered westward from the Baltic and the Black Sea. The longer sailing route to Asia normally makes it less competitive than Middle East crudes that take half the time to reach the Far East.

A cargo of Urals from the Baltic sea costs $6 a barrel to ship, twice as much as its Persian Gulf peers, says pricing agency Argus Media. That difference is now vastly offset by a Russian discount of $26 a barrel for these shipments, according to the International Energy Agency.

For Russia, the upshot of higher volume is offset by its heavy discounts. Its revenues fell by $1.4 billion to $13.3 billion in May compared with the previous month, roughly in line with lower international oil prices.

Write to Summer Said at summer.said@wsj.com and Benoit Faucon at benoit.faucon@wsj.com

Appeared in the June 28, 2023, print edition as ‘Russia Poised to Top Saudi Arabia As Largest Supplier of Oil to China’.