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Page added on January 21, 2016
Saudis Protect Oil Market Share By Spending Petrodollars In China
The battle to retain and even increase global oil market share is intensifying. Both Saudi Arabia and Russia, the world’s top two crude oil producers, continue to ramp up production amid an unprecedented supply glut and associated price collapse for crude that is rocking the world financial system.
This week several analysts once again downgraded their global oil price forecast, many forecasting prices in the lower $20s-range, while Standard Chartered called for oil prices to reach an unimaginable $10 a barrel – something until recently would have seemed like a misprint in the financial press.
As sanctions against Tehran’s energy sector are lifted, though there are still various other sanctions in place over the country’s ballistic missile program and sponsorship of terrorism, Iran will enter the fray of an oil market that has arguably gone mad . With Iran set to add an additional 500,000 barrel of crude to the market that is already over supplied by around 1.5 million barrels a day, the battle for oil market share will get even uglier in both Europe and Asia.
Now, the Saudis are furthering their talks with Chinese oil majors Sinopec and CNPC to finance refineries to help Saudi petroleum sales in China. On Tuesday, Saudi state media said, without giving details, that Saudi Aramco and Sinopec signed an agreement for strategic cooperation.
Khalid al-Falih, chairman of Saudi Aramco, in a September 2015 photo. AFP PHOTO/MOHAMMED AL-SHAIKH/Getty Images)
Khalid al-Falih, chairman of state-owned oil giant Saudi Aramco, said on Wednesday that talks are in advanced stages, while projects include refineries in the Chinese city of Qingdao and in the provinces of Yunnan and Sichuan.
The talks come just a little over week after Saudi Arabia said it’s considering a Saudi Aramco IPO that could include listing at least part of its exploration and production assets. It would be the the most valuable company in the world, dwarfing other oil majors. Saudi Aramco has both the world’s largest proven crude oil reserves, at more than 260 billion barrels, though those figures are a subject of debate, and the world’s largest daily oil production. In 2012, the company generated $1 billion in revenue daily. The Wall Street Journal said on Thursday that many oil-market observers expect the kingdom to package its expanded refining and chemical arms into a new listed company.
While joint refining ventures between oil companies and various countries is nothing new, the timing of this most recent disclosure deserves extra attention. The Saudis have to ward off Russia and Iran in both Europe and Asia and particularly China, the world’s second largest oil importer after the US, for market share. The situation has been excaberated since the Saudis share of the Chinese market increased only 2% in the first 11 months of 2015. However, overall oil import growth by China ticked up 9% during this period, while Russian oil imports, amid accelerated geopolitical maneuvering by Russian President Vladimir Putin, rose nearly 30%.
In light of Russia’s inroads in China’s oil market, the Saudis have little choice but to invest its petrodollars in the Middle Kingdom. After all, there are other ways of protecting oil market share than just ramping up production; you can in essence secure more oil market share by building refineries to soak up that production.
What will be interesting now is to see what both Russia and Iran will do. For the mid-term Iran won’t have the necessary funds to keep in step with the Saudis, but as funds and foreign capital begins to rebuild the Iranian oil sector, Tehran will likely meet the Saudis on the playing field of providing funding for join ventures, with the associated geopolitical ramifications that development will bring to current Saudi-Iranian diplomatic relations.
However, on Wednesday Chinese President Xi Jinping is traveling to Egypt for two days before heading to Iran. Xi has been known to travel with fists full of dollars, in this case Yuan, to achieve his country’s energy and geopolitical aims. So, new oil and gas deals could come from that meeting in Tehran. China has been Iran’s biggest trading partner for the past six years and the biggest buyer of its crude oil and non-petroleum products.
Russia is also in a dilemma. With nearly 70% of Russian state revenue derived from its oil and gas sector, Moscow also can’t sit idle while the Saudis cleverly maneuver new deals in China. Watch for Russian oil companies to also make their move, though currently with sanctions against Russian energy companies by Western powers, they, like their Iranian counterparts, will take time to implement any new strategy.
3 Comments on "Saudis Protect Oil Market Share By Spending Petrodollars In China"
makati1 on Thu, 21st Jan 2016 6:17 am
If this article is correct, I think the author of the above needs to go back to the drawing board.
“Saudi Arabia will soon sign several contracts to purchase military hardware from Russia. It goes about a major deal to buy various modifications of combat helicopters, T-90C tanks, armored vehicles and anti-aircraft missile systems. The deal approximately totals $2 billion. Saudi Arabia will purchase Mi-171, Mi-35 choppers and T-90C tanks until the end of this year Pravda.Ru reports. … As for anti-aircraft missile complexes, the nation intends to purchase state-of-the-art S-400 Triumph missile systems. …”
http://indiandefence.com/threads/russia-to-sell-weapons-to-saudi-arabia-worth-billions-of-dollars.45777/
Now why would they do that? Interesting, no?
Davy on Thu, 21st Jan 2016 7:21 am
You don’t hear much about counties using the Yuan in bilateral trade much anymore. Who in their right mind would be using Yuan in large transactions when there is the potential for a 50% devaluation? I remember back a year or so everyone was crowing about the Yuan as the new world reserve currency and with that the death of the dollar. Bricophiles have been mute lately. I hate to say “told you so” but I did. It is quite apparent that the global system of currencies is going to become increasingly dysfunctional and dangerous deflationary with a cycle of devaluations with the resulting trade distortions. The US is not going to benefit from this if some of you think I am flag waiving. Trade is a two way street and currencies revaluations a zero sum game. There will be winners and losers in the short term but in the long term we all suffer from dysfunction.
twocats on Thu, 21st Jan 2016 11:38 am
makati – are you saying the article doesn’t make sense because SA is buying weapons from Russia so why would it be battling on the oil share front with Russia?
Davy – Yes, I think a lot of people thought China was the “more sane and rational” actor in this game, basically on the road to bankrupting the US and then at least establishing itself as one of a basket of stable currencies. But China WAS added to the UN’s SDR/XDR, official on October 1 of this year. So their plan worked. I wouldn’t be surprised if some of this deflation was a prerequisite to getting into the XDR. Everyone else is devaluing currency and it would look really bad if China didn’t do its part as well.
From a pure economic standpoint the dilemma China finds itself in is pretty simple. If it DOESN’T devalue, its currency appreciates and it’s no longer a low cost producer. That only work for countries like the US which don’t make anything and only consume the worlds resources. China is working on converting to a more consumer-based society.
If it DOES devalue, like its been doing of late, it makes the yuan less attractive, and accelerates capital outflow. So you can either keep foreign investors happy or your massive workforce happy. Which would you choose.
From SA’s standpoint, building a good relationship with China isn’t about a short term profit based on Yuan appreciation, but diversification and long term economic connections. Even after a global economic collapse, China is just a hop-skip down the Silk Road.