Saudi Arabia, the world’s largest crude oil exporter, now ranks first in crude oil sales to China, the world’s largest importer, having overcome its primary competitor, Russia, in the delivery of oil to the Chinese market.
According to figures from the Chinese General Administration of Customs, China imported 1.81 million barrels per day (bpd) of crude oil from Saudi Arabia in the first two months of 2022. This figure topped China’s crude oil imports from Russia, which stood at 1.57 million barrels per day, a 15% decrease when compared to Saudi Arabia’s imports during the same period. While China’s crude oil demand from Saudi Arabia has fallen by 3% year on year since the beginning of 2022, the country’s demand from Russia has fallen by a stunning 9.1% during the same period.
Why is China demanding less Crude Oil from Russia?
Despite Western sanctions, Russian crude oil has plummeted and is now selling at a discount to the price of crude oil from other producers such as Saudi Arabia and other OPEC members. Nonetheless, Chinese crude oil imports from Russia have decreased by 9% since the beginning of this year, owing to the following factors:
Demand from Chinese independent refineries for Russian crude oil, including one of their favorite blends, Russian ESPO, has decreased as a result of the Chinese government’s recent efforts to reform the crude oil refining sector, as well as a crackdown on tax evasion and illicit practices at ports. This means that China is now favoring quotas for newer and more advanced private refineries engaged in transparent activities over smaller independent refiners, some of which are being probed for alleged improper tax and trade practices.
Furthermore, China is not shying away from Russian crude oil, in contrast to the West, after President of the United States, Joe Biden, banned the importation of Russian oil into the United States, and with similar threats by the United Kingdom and the European Union to boycott the purchase of Russian crude oil. However, the recent decline for Russian crude oil from the Chinese market is attributable to the inability of the large independent refineries to obtain the dollar-denominated letters of credit required to complete the purchase from the top Chinese banks. The Industrial and Commercial Bank of China (ICBC) stopped issuing dollar-denominated letters of credit for physical Russian commodity transactions while the Bank of China has also restricted financing on some level to companies intending to purchase Russian commodities last month.
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According to Reuters, the Chinese government awarded its first batch of 2022 crude oil import permits to largely independent refiners, totaling 109.03 million tonnes in crude oil importation, a figure that is 11% lower than the initial allotment in 2021. This suggests that China now prefers to give quotas to newer and more sophisticated private refineries, as the three largest private refiners in China, Zhejiang Petrochemical, Hengli Petrochemical, and Shenghong Petrochemical accounted for only 38% of the first batch import limit. The Chinese government’s reduction in crude oil import quotas would have resulted in low crude oil imports by refiners.
Meanwhile, the intermittent increase in China’s purchases of Iranian crude oil may have exacerbated the drop in demand for Russia’s crude supplies, as crude oil transactions between China and Iran exceed the peak recorded in 2017. According to Reuters, Chinese imports hit 700,000 barrels per day (bpd) in January, exceeding the 623,000 barrels-per-day peak recorded by Chinese customs in 2017, before the former US President Donald Trump reimposed sanctions on Iranian oil exports in 2018. I believe that China, the world’s largest oil importer, is increasing its purchases of Iranian crude oil as part of talks between Tehran and international powers to revive a 2015 nuclear deal that will lift U.S. sanctions on Iran’s oil exports.
However, I believe that China will increase its purchases of Russian crude oil in the coming months if Russian crude continues to trade at a significant discount amid geopolitical tensions with Ukraine, particularly if Western buyers and traders continue to self-sanction Russia’s crude oil in support of Ukraine.
