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Saudi Arabia is losing its crown to Russia

Russian exports have more than doubled to China since 2010, where the import from Saudi Arabia dropped with 42% from April. It goes without saying that Saudi Arabia will not be pleased with Russia becoming China's number one oil supplier.

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In the 1600s trade between China and Russia flowed from the East, in the form of tea leaves swapped for fur. It is now flowing back in the form of dark viscous crude oil, traded for yuan.

No longer using the caravans on the Tea Road, the oil is sent by sea and a series of pipes, including the 4,857km Eastern Siberia – Pacific Ocean pipeline. And what a lot of oil it is. Last month it became China’s top crude oil supplier.

It goes without saying that Saudi will not be pleased by this growing relationship. Reducing demand from the US and a much lower price per barrel meant China was a potentially lucrative market. In March Sinopec President Chen Bo predicted Russian crude oil supplies would remain at the 2014 level. That gave confidence to Saudi Aramco, with its president and CEO Khalid Al-Falih saying, “We see our energy supply potentially doubling at one point of time as China’s energy demand grows.” The month before the oil giant had cut prices to Asia by 90 cents – thought to have been the lowest discount in around 14 years. It had also invested in two refinery projects in the eastern province of Fuijan in cooperation with Sinopec.

But instead of OPEC imports being increased, that honour went to Russia. In fact their exports went up by 20%. In May they hit a record 927,000 barrels a day according to the Beijing based General Administration of Customs. Russian exports to China have now more than doubled to China since 2010. The import from Saudi dropped 42% from April.

As sanctions over Ukraine impacted on the country’s relationship with the West, Russia has concentrated its sweet talking efforts on the East. Analysts point to a number of oil for loan deals that the two countries have signed – highlighting the 2013 $85bn deal with China Petrochemical Corp and the $270bn handshake over the Russian – backed Rosneft. That was one of the biggest deal in the industry’s history and gave Moscow up to $70bn in upfront payments which in turn enabled Russia to develop new remote Artic fields.

The move by China is part of its plan to spread its oil sources. Gao Jian, an analyst at SCI International told Bloomberg, “China is already on track to diversify crude purchases and with its oil demand stabilizing, imports from its traditional suppliers will be displaced.”

By purchasing more oil from Russia, China reduces dependence on maritime oil supplies from the Middle East that is subject to interruptions due to the weather.

“Russia is using its good relationship with China to increase supplies and has now taken the top spot,” Jian added. “Meanwhile, Saudi Arabia is losing its crown as its selling prices in Asia haven’t been attractive enough.” That feeling was echoed by Gordon Kwan at Nomura Holdings Inc who told Bloomberg, “If Saudi Arabia wants to recapture its number one ranking, it needs to accept the renminbi for oil payments instead of just the dollar.”

One thing is for sure – Saudi Aramco isn’t shy of plunging headfirst into a battle royale. We’ve seen what it has led OPEC to do in the battle against the US shale drilling threat. It will be interesting to see where it goes with Moscow.
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