China’s purchases of crude oil for the sake of building its stocks have helped ease the oil market towards balance, the International Energy Agency (IEA) said in this month’s Oil Market Report.
Furthermore, Chinese companies have expressed to Saudi Arabia their interest in acquiring the entire 5% stake in Aramco that Riyadh is considering for an international initial public offering (IPO) next year, according to Reuters.
“China has played a major role in global crude oil markets by helping to clear most of the excess seen in the last two-three years,” the IEA said. During the first half of this year, China saw a record stock build of 1 million bpd, but that fell by half during the third quarter, the agency said.
It has calculated that China currently holds crude stocks of around 850 million barrels, which is comparable to the combined stocks of Japan and South Korea. The country now has stocks to cover some 90 days of imports and total demand for 60 days, the agency said.
China since January 2015 has spent about US$24 billion on buying “excess” crude oil at an average price of about US$50 per barrel, the IEA said, noting the figure as a “rough calculation”.
Citing the strength of the first half stock build, China’s oil demand growth is seen as averaging 540,000 bpd for 2017 and slowing to 325,000 bpd in 2018.
Meanwhile, Bloomberg calculated that China’s imports of crude oil averaged 9.04 million bpd in September, an increase of 13% on August. It cited last week figures from the Jefferies Group for Chinese oil demand expanding by 820,000 bpd during 2017.
China’s demand for foreign crude has engaged the world’s two largest oil exporters. Russia last year dislodged Saudi Arabia as China’s main source of crude supply.
Russian crude shipments to China are predicted to increase in the near future once the expansion work on the Eastern Siberia Pacific Ocean (ESPO) pipeline is complete, enabling Russian state-owned oil giant Rosneft to boost crude shipments to PetroChina to 600,000 bpd. More Russian crude will arrive via the crude pipeline through Kazakhstan.
Russia has turned to China as a market unfettered by international sanctions, while China has invested in Russia oil and gas companies, illustrated by the recent acquisition by China’s CEFC of 14% of Rosneft for US$9 billion and a 9.9% stake in Novatek’s Yamal LNG project by China’s Silk Road Fund.
While Saudi Arabia is now China’s second largest oil supplier, the relationship between Beijing and Riyadh may become much closer.
China is moving to persuade Saudi Arabia to accept payment for oil supplies in yuan instead of US dollars. Analysts make the point that as the world’s largest oil importer, China will be in a position to insist that Saudi Arabia accept yuan, and if that happens there is the risk that the dollar would cease to be the world’s reserve currency as other oil producers begin to accept payment in yuan.
As Chinese demand for imports rises, it will have a stronger argument as US demand for imported crude declines.
Furthermore, there is the prospect that China will buy the 5% of Saudi Aramco that Riyadh has been planning to offer to foreign investors through an IPO with the intention of using the money from the sale to invest in diversifying the Saudi economy.
Reuters reported on October 16 that China’s PetroChina and Sinopec had offered to buy the 5% directly. The agency said that a Chinese group that includes the country’s sovereign wealth fund was involved in the offer.
The value of Aramco has yet to be determined, but Riyadh has expressed the hope that as much as US$100 billion could be raised from the sale of 5% if the value is put at US$2 trillion. Until now, there has been no decision on where the IPO would be listed, and there have been reports saying that there are a number of Saudi officials who are urging that the sale be delayed until the price of oil climbs to US$60 per barrel or better.
The news agency reported that Saudi Arabia was “keen” on the proposed deal, as it is Aramco’s largest market. Yet if Riyadh did decide on a direct purchase, it might not be for the entire 5%.
It said that the sovereign wealth funds of Japan, South Korea and Russia were also interested in purchasing shares in Aramco.
China is also holding a card that will very likely have an impact on the future of crude oil: that is the decision by China’s government to phase out fuel-powered automobiles and switch to electric cars, a move that would not only clear up much of China’s air pollution, but also ease demand on crude imports.
Chinese authorities have not set a target date for a ban on traditional automobiles, but as the change to e-cars gains pace over the next decade – not only in China, but globally – China’s evolution to a gasoline and diesel-free transportation sector will contribute to the unimaginable impact on the entire oil industry.