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China key to oil market pricing as the world's top importer

Price agencies and industry leaders call on Beijing to lift veil on nation’s crude trades

China poses a major obstacle to global oil price transparency as it overtakes the US as the world’s biggest importer of oil. The US Energy Information Administration (EIA) estimated that China imported a net 6.3 million barrels a day (b/d) of oil and refined products in September, pushing it past the US to become the world’s top oil importer.

Having pushed ahead of the US, the EIA expects China will remain the world’s top importer for the foreseeable future, reflecting its own economic expansion but also the surprising surge in US shale-gas production, which has cut US dependence on oil imports. “It’s an important demarcation line because we know very little about Chinese demand and inventories. We don’t know a lot about import or export levels either,” Edward Morse, global head of commodities research at investment bank Citigroup, told WEC 2013.

He added: “Transparency is suffering because of this great big black hole of information that’s occurring, not only with China overtaking the US, but as non-OECD markets overtake the position of OECD markets, which poses a general transparency problem in terms of data performance.”

“China needs to take the lead if the world is going to become more transparent and needs to drop its mercantilist attitude toward information being a secret of the state. It needs to throw more than five or six people at information gathering and it needs to control its borders better,” Morse told delegates.

Even member countries of the Organisation for Economic Co-operation and Development (OECD), which provide the most important data on prices and trade flows are throwing less resources at information provision than they have in the past due to fiscal constraints, exacerbating the transparency issue.

Indeed the conference heard that political, as well as public interest, in the oil markets and sensitivity about financial markets remains high. In particular, there are widespread concerns that oil prices have been manipulated. But recent academic research suggests that oil prices are driven primarily by the fundamentals of demand and supply, not financial speculators.

Jorge Montepeque, global editorial director of market pricing agency Platts, which, along with Shell, BP and Statoil, is under investigation by the European Union for suspected price manipulation, said the pricing is right. “The truth hurts, but the truth is what the price is, no matter where you look,” he told delegates.

If you look at prices in the US Gulf, Europe, as well as in China, South Korea and Singapore, crude is sold everywhere at about $110 per barrel, in the Middle East it’s a little less because there is no transport cost,” said Montepeque. “The question is whether you can have policies that can make the price more friendly towards you, whether you are a producer or consumer,” he said.

The biggest threat to pricing comes from Europe, as policy makers fail to understand the complexity of the oil markets, Peter Caddy, head of business development at pricing agency Argus said. Montepeque added: “In the West right now there is a discomfort with price.

Previously, the West was very friendly to free markets, but now it seems to be less so. At the same time Asia is growing very fast and this creates a gravitational pull as the region says we need your energy and investment. “If you have two opposite sides of the world, one saying we’re not so friendly to markets and one saying we are, I wonder what will happen over the next five to 10 years as markets evolve and maybe benchmarks,” he added. Clearly, there is an obvious need for a new benchmark in Asia, more transparency and more accurate data would help fix that, Ali Hached, senior advisor to Opec-member Algeria’s ministry of energy, said. 

Logically China, which is also a very large producer, should be the source of pricing for the world, but the government does not do the world any favours, in terms of promoting a benchmark, said Morse. “I don’t expect China, even as the Shanghai exchange makes efforts to create a benchmark, to succeed. But there are natural crude benchmarks emerging in the region,” he added.

Notably, spot volumes from Russia that are expanding to over 1m to 1.5m b/d, which Middle East crudes are effectively being priced off, as well as rising volumes of Basra light from Iraq, offering opportunities. 

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