FSUOGM: China stresses close energy relationship with Russia

China is eager to expand its partnership with Russia in the energy sphere, Chinese President Xi Jinping said last week, days before the EU is set to impose its embargo on Russian crude imports.

China has ramped up imports of Russian oil despite the economic slowdown caused by stringent COVID-19 restrictions this year, taking advantage of the steep discount that Urals and other Russian blends are currently trading at compared to global benchmarks.

That discount, currently at $20-25 per barrel versus Brent, is expected to grow depending on the success of the EU’s embargo of most Russian oil imports, due to come into force on December 5. Russia is now scrambling to divert oil supplies that would have flowed to Europe via the Druzhba pipeline to sea ports, where they can be loaded onto tankers for shipment predominantly in Asia.

It is unclear to what extent that China will abide by a separate price cap on Russian oil, introduced by the EU and its G7 partners in order to deprive Moscow of revenues internationally. Most shipping and insurance companies are based in EU or G7 countries, and those companies will be prohibited from providing their services for handling Russian crude unless the price cap is adhered to. At a level of $60 per barrel, the price cap is roughly in line with the price that discounted Urals is already trading at, which might limit the immediate impact of the measure. But the cap might have a greater impact if the natural price of Urals rises, and the cap could be lowered, now that the legislation is in place, at a later point.

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