Saudi crude unlikely to sell in yuan even as market intensifies

Dubai: The fight for market share in the world’s second largest oil consumer, China, is intensifying as the United States, the world’s largest crude consumer, continues to draw down its dependence on foreign oil.

In May, Russia overtook Saudi Arabia as China’s largest crude supplier for the first time since October 2005. Russia increased its crude exports to China by 20 per cent to a record 3.92 million metric tonnes, according to data emailed to Bloomberg by the Beijing-based General Administration of Customs in June. Saudi Arabian exports dropped 42 per cent to 3.05 million.

“There is probably more of a broader relationship that China has built with Russia in the oil market. China has been trying to diversify its sources of oil. And Russia clearly with all the sanctions it has been facing is rather desperate,” Gary Dugan, Chief Investment Officer at the National Bank of Abu Dhabi (NBAD), told Gulf News by phone.

“It has been more of a strategic relationship … [and] certainly taken off through the summer months where the volumes now going from Russia to China are quite considerable,” he said.

The increase in Russian crude to China is partly because Russia is now selling to its southern neighbour in the Chinese currency, the yuan. The decision to move away from the dollar has helped Russia find new markets for its crude despite western sanctions and has allowed it to knock-off Saudi Arabia as China’s number one supplier, a position it held for 13 consecutive months.

But Saudi Arabia is unlikely to try and recapture Chinese market share by selling in the yuan despite the relative success Russia is having, market watchers say. “Saudi Arabia might settle transactions in yuan, but that would complicate things due to the need for currency hedging. And I don’t think they would price oil in yuan, as that would further complicate transactions,” Robin Mills, head of consulting at Manaar Energy in Dubai, told Gulf News by email.

Saudi Arabia sells its oil in dollars, which its own currency, the riyal, is permanently pegged to. Selling in other currencies would leave it more exposed to currency fluctuations, such as the recent devaluation of the yuan.

Amrita Sen, London-based Chief Oil Analyst at Energy Aspects, agrees with Mills. “We don’t think it’s likely,” she said by email.

Russia is not selling its crude to the Chinese in the yuan solely because of American and European sanctions over the crisis in Ukraine. Russia exports its crude through China through the Eastern Siberia — Pacific Ocean pipeline to reach Asia-Pacific market and some of its state-owned or backed companies have received oil-backed loans from China.

“Those also give China leverage to ask for payment in yuan,” Mills said.

Saudi Arabia’s position in the oil market is becoming desperate, according to some analysts, but the de facto head of the Organisation of Petroleum Exporting Countries (Opec), a group that controls 80 per cent of the world’s proven oil reserves, is yet to budge.

In April, Saudi Arabian Oil Minister Ali Al Naimi reportedly said he expected crude prices to rise in the “near future.” Global benchmark Brent crude has fallen nearly 23 per cent since Al Naimi’s comments to $43.54 a barrel as of 2pm local time on Tuesday.

In March, Saudi Arabia offered record discounts to Asian markets, seeking to cling onto market share. But the longer Saudi Arabia continues to play the long game and wait for oil prices to rebound, it may give room for China to leverage its position.

“It’s [China] becoming a less important market in terms of volume but it’s a very important market in terms of huge growth and demand,” Dugan said.

“The Chinese may try to play it is to say ‘well Saudi Arabia if you want a five-year contract to supply us it has to be in this new currency. If you just want to play in the spot market you can have your dollars but that’s just in the month to month’,” he said.

The lifting of western sanctions against Iran, which will allow the country to sell more oil and to new markets will also place further pressure on Saudi Arabia. “Iran in the past has been one of those countries happy to accept Chinese currency,” Dugan said.