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Battlefield China in Russo-Saudi tussle

Russia and Saudi Arabia have largely buried, rather than settled, their issues. China is a microcosm of the ongoing tension

Saudi Arabia may have, albeit at very painful cost, re-established itself as top dog in global energy geopolitics. But its naked rivalry with Russia is just on the backburner—as all producers try to deal with the fallout from Covid-19—rather than permanently put to bed.

The two heavyweights’ informal market-share competition continues, and the competition in China is perhaps its best example. While Riyadh managed to sell a record 2.16mn bl/d to Beijing in May (an increase of 95pc year-on-year and 71pc month-on-month), beating Moscow to the title of top supplier to the world’s largest oil and gas importer, few believe the race is over.

Russia typically relies on pipelines and fixed long-term contracts as an advantage in that contest. But Saudi Arabia has over several months been attacking with steep discounts to Asian customers and other perks such as payment deferrals. China, meanwhile, happily stocks up its inventories with cheap crude, with its exclusive control of information on storage availability and domestic oil demand giving it front-foot advantage over ­enthusiastic sellers.

2.16mn bl/d – Saudi sales to China in May

“Saudi Arabia went strongly ahead of Russia in May,” says Robin Mills, CEO of Dubai-based consultancy Qamar Energy. “However, Russia’s exports of c.1.6mn bl/d should be quite robust due to use of the Espo [Eastern Siberia Pacific Ocean] pipeline, while I expect Saudi exports to drop as production cuts come into force, high [official selling prices] deter buyers, and more US crude comes into China.”

The world’s two top crude exporters are locked in a delicate dance, with other heavyweight partners in the ballroom and the unpredictability of the macroeconomic environment akin to a moving dancefloor beneath them.

The crumbling of Opec+ and immediate Saudi move to unconstrained production highlights the underlying appetites of both sides to test their competitively advantaged barrels on the open market. But they know they must show restraint to try to boost oil prices and plug gaping domestic budget holes.

At the same time—while current fears over Covid-19 second waves and no end to the global economic contraction can make it seem remote—both are aware that, given the scale of sidelined production, a demand rebound on easing lockdown constraints could send prices swiftly higher. Ensuring prices remain below $50/bl is key to keeping their other big rival—the US shale industry—running up losses and shutting in wells.

Holding firm

For now, the Opec+ deal appears solid as a rock. While Riyadh in particular continues to indulge in public admonition of delinquents such as Angola and Nigeria, Russia and Saudi Arabia demonstrated impressive levels of cooperation in early June when they extended the Opec+ production cuts of 9.7mn bl/d, or roughly 10pc of the world’s supply, for another month. Equally telling was an agreement on a mechanism to ensure free-riders among the cartel’s members did not just eventually move into line, but also compensated for any ­previous ­overproduction.

“I expect Saudi exports to drop as production cuts come into force, high [official selling prices] deter buyers, and more US crude comes into China” Mills, Qamar Energy

“We are currently in a period of appeasement between two of the world’s leading oil producers, who have visibly taken a lesson from their unrestricted price war this March,” says George Voloshin, a senior analyst at Aperio Intelligence, a UK-based strategic intelligence company. “This applies not only to China but also to other markets and includes a much-stronger-than-previously policing element with respect to compliance within Opec+.”

Yet under the surface, the rivalry boils—and China has been more than happy to keep stoking it to get the best deals from each side. While it raised its July posted prices, Riyadh refused to extend, alongside the rolled-over Opec+ cuts, a separate voluntary reduction of c.1mn bl/d it undertook in June. More of a “game of musical chairs” in Russia’s and Saudi Arabia’s crude exports will thus ensue, Voloshin predicts

“There are also reports that a handful of large Chinese oil importers, mostly state-owned corporations, intend to bid collectively for oil on spot markets to obtain better prices,” he says. “That would also have an impact on relative volumes sold by Russia and Saudi Arabia.”

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