Saudi Arabia Remains China’s Top Oil Supplier Despite Deep Russian Discounts

• Saudi Arabia was China’s top oil supplier in January and February, a position that Russia temporarily held in December 2021.
• China generally does not adhere to Western sanctions and could be tempted to buy up heavily discounted oil from Russia.
• Russian producers have not been able to sell their spot cargoes in tenders in Europe because no one is bidding.

The world’s largest oil exporter, Saudi Arabia, was once again the top supplier of crude to the world’s top importer, China, beating its partner in the OPEC+ deal, Russia, to the top spot for deliveries in January and February 2022.  

Chinese crude oil imports from Russia fell by just over 9 percent in the first two months of this year, per data from China’s General Administration of Customs cited by Reuters, as independent refiners reduced purchases of crude, including of one of their favorite blends, Russian ESPO, due to lower quotas and a crackdown on illicit practices from the Chinese authorities. 

Going forward, it is not clear how much Russian crude China will import, considering the fact that China isn’t shying away from Russia’s energy as most of the rest of the world has already done following Putin’s invasion of Ukraine. However, some large Chinese state-owned banks have halted the issuance of dollar-denominated letters of credit for physical Russian commodities purchases. Being unable to secure such letters of credit, some independent refiners, the so-called teapots, have reportedly started looking for alternatives. On the other hand, China has generally not followed Western sanctions – as is the case with Iran – so it’s likely that it could see an opportunity to snap up heavily discounted Russian crude. 

In January and February, Russia was superseded by Saudi Arabia as the top Chinese oil supplier, after Russia was the biggest supplier of crude to the world’s top importer in December 2021. China’s imports from Saudi Arabia averaged the equivalent of 1.81 million barrels per day (bpd) in the first two months of 2022, down by 3 percent year over year, per Chinese customs data in tons converted into barrels by Reuters. 

Imports from Russia stood at 1.57 million bpd, down by 9.1 percent annually, as Chinese teapots reduced overall imports. That’s because Chinese authorities granted at the end of last year 11 percent lower crude import quotas to independent refiners in the first batch of quota allowances for 2022. The government, intent on reforming the independent refining sector and cracking down on tax evasion and illicit practices at the teapots, is now allowing its independent refiners to import 109 million tons of crude oil in the first batch for 2022, down by 11 percent compared to the first batch of quotas granted for 2021. The three biggest private refiners in China—Zhejiang Petrochemical, Hengli Petrochemical, and Shenghong Petrochemical – together accounted for around 38 percent of all first-batch import allowances, a document seen by Reuters showed. This suggests that China is now favoring giving quotas to the newer and more sophisticated private refineries as it cracks down on smaller and more polluting independent refiners, some of which are being investigated over alleged irregular tax and trade practices.  

In the coming months, however, China could turn to more barrels of Russian crude at hefty discounts, which could make Russia a top supplier of crude to the world’s top oil importer again. Some Russian oil producers are reportedly selling crude to China without bank guarantees. 

For example, Russian oil firm Surgutneftegaz continues to sell its oil to Chinese buyers even without bank guarantees, from which many banks have pulled out after the Western allies kicked several Russian banks out of the SWIFT system, Reuters reported exclusively earlier this month, quoting three sources familiar with the matter. 

Oil traders are staying away from Russian crude after the Western countries banned selected Russian banks from SWIFT, while Russian producers have not been able to sell their spot cargoes in tenders in Europe because no one is bidding.

But in China, the trade continues, as Surgutneftegaz is now allowing Chinese customers to take oil without providing the bank guarantees, the so-called letters of credit, according to Reuters’ sources. 

China will likely be unable to take all the crude that Western buyers and traders are shunning right now, but it will likely take advantage of discounted Russian barrels when they become available. 

By Tsvetana Paraskova for Oilprice.com

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