Opec under pressure as China builds relationships with oil exporters
Launceston, Australia — The shifting dynamics of China’s crude oil imports show the scale of the challenges facing oil cartel Opec and its allies ahead of a decision on whether to continue with production cuts.
The detailed Chinese customs data for October illustrates trends that should give pause for thought to the leaders of Opec and its allies, particularly major exporter Russia, ahead of the meeting in Vienna on Thursday.
Market share is the big issue for shippers to China, the world’s largest crude importer, and there are two strands to the problem.
The first is that the import data shows how China has been able to develop new relationships with oil exporters fairly rapidly, reducing reliance on some traditional suppliers from Opec.
The second is that it appears that the burden of reducing exports, at least as far as China is concerned, is not being shared remotely equally by members of Opec and their partners in output cuts.
This imbalance raises the chance that an extension to the overall output cuts first agreed a year ago will prove ineffective as some parties to the deal are tempted to export more in a bid to retain, or expand, market share.
US export surge
China’s imports from the US neatly encapsulate the dilemma that Opec and its allies have in dealing with the challenge of rising US exports on the back of the boom in shale oil.
China imported about 206,900 barrels per day (bpd) from the US in October, the second-highest monthly amount on record since this trade flow started late last year.
Granted, that level of shipments does not seem to present much of a threat to top suppliers Russia and Saudi Arabia, whose exports to China in October stood at 1.09-million bpd and 1.08-million bpd respectively.
But it represents a huge increase in less than a year, with China’s imports from the US going from virtually zero in 2016, to a monthly average of 135,000 bpd in the first 10 months of the year.
It also seems that US exports are going to keep increasing in coming months, and quite strongly, according to vessel-tracking data compiled by Thomson Reuters Oil Research and Forecasts.
The shipping data show that China’s November US imports should be around 242,000 bpd, based on six cargoes that have already been discharged at Chinese ports.
In December, they may rise to 379,000 bpd as the vessel-tracking data shows six cargoes already under way, all of them very large crude carriers with around 2-million barrels per ship.
From non-entity to serious player
At a figure getting fairly close to 400,000 bpd, the US would probably become China’s seventh largest supplier of crude, something that becomes much more than just a nuisance as far as the big guns of Saudi Arabia, Russia, Angola, Iran and Iraq are concerned.
The rise of non-traditional crude exporters to China such as the US, Brazil and even Great Britain may also cause some of those countries trying to re-balance the market through output cuts to think more about preserving market share.
Producers such as Russia and Saudi Arabia ship to numerous countries, but the China data shows that as far as exports there are concerned, some Opec countries and their partners appear to be doing more than others.
China imported 1.04-million bpd from Saudi Arabia in the first 10 months of the year, an increase of just 1% from the same period last year.
Over the same period China bought 1.19-million bpd from Russia, up 16%, and 1.04-million bpd from Angola, a jump of almost 18%. These two countries have overtaken Saudi Arabia as the top suppliers to China so far this year.
While Russia and Angola may be cutting exports to other buyers, they have certainly worked to boost market share in China, with both achieving growth rates above China’s overall 11.8% increase in crude imports in the first 10 months.
The other major Middle East exporters have, similar to the Saudis, been more restrained in exporting to China, with imports from Iran up 2.2% and Iraq by 1.6%.
If Opec and its allies are going to extend their output cuts of 1.8-million bpd beyond the current March expiry, the key to success will be ensuring compliance.
If some exporters are complying more enthusiastically than others, the deal risks gradually falling apart.
Put another way, how happy will Saudi Arabia, Iran and Iraq be at seeing their allies Russia and Angola exporting more to China, as well as watching emerging rivals like the US and others chip away their share of the China crude market?