Oil traders have been watching closely as China struggles to find ways of living with Covid-19, following nearly three years of strict controls and restrictions.
News of an increase in cases of the virus last month sent crude prices lower on fears that it made another round of lockdowns more likely, dampening hopes of a recovery in the Chinese economy. But this week expectations grew that Beijing is going to backtrack on its zero-Covid stance, despite the risk of a much wider surge in infections. Share markets rose across the Asia-Pacific region, following reports that the Chinese government had started to relax virus-testing rules nationwide (see page 1). The rollback was seen as a bonus for the global oil markets because of China’s position as the world’s largest oil importer.
Futures for benchmarks like Brent and West Texas Intermediate crude logged gains on speculation about the turnaround in thinking, although trading was choppy, with prices sliding back into negative territory on concerns that the Federal Reserve isn’t finished with rises in interest rates.
The uncertain outlook for oil also comes at the same time as the onset of new sanctions from the European Union on imports of Russian crude by sea, which came into effect this week.
Under the scheme the EU is joining G7 nations in blocking companies from arranging the shipping of Russian oil unless the crude is being purchased for less than $60 a barrel. Commentators don’t expect to see an immediate impact on oil flows, because prices for much of Russia’s crude are trading below the $60 level (Ukrainian President Volodymyr Zelensky has described the plan as “weak”, for instance). But all the same, about 1.5 million barrels a day is looking for new buyers, and the Russians are threatening to stop oil sales completely to any countries that adopt the price caps.
The impact of the scheme was felt immediately in Turkish waters on Monday, where a traffic jam of tankers was soon building up after Ankara demanded proof that the vessels were fully covered by insurers.
A more dramatic shift in oil exports could benefit Chinese buyers, including the so-called ‘teapot’ refiners (smaller, non-state owned enterprises that have been active in the market for discounted oil cargoes from Russia). The EU restrictions won’t dissuade them from doing more business, after Beijing rejected suggestions that its companies should join the price cap programme. Bloomberg was also reporting last week that refiners from China had been buying Russian oil at bigger discounts than a few weeks ago (and paying in yuan rather than dollars) and that they are likely to push for even cheaper prices as a result of the EU restrictions.
A ‘shadow’ fleet of older tankers has already been assembled to carry the Russian oil beyond the reach of European sanctions and purchases are being made on a delivered basis, which means that the risks and responsibilities for shipping it are with the seller, not the buyers. China and India now purchase two-thirds of the crude exported by sea from Russia; while half of the oil exported by pipeline from Russia flows to China, Bloomberg adds.
China is also looking to broaden its sources of oil supply over the longer term. Energy major CNOOC confirmed last week that it had acquired an additional 5% stake in the Buzios field, off the coast of Rio de Janeiro, from Petrobras for about $1.9 billion, for instance. Further investment is likely to follow in other offshore projects in Brazilian waters.
Energy deals are also going to be high on the agenda this week during President Xi Jinping’s trip to Saudi Arabia, the country that remains China’s largest supplier of crude (see page 7). Analysts have described the trip as part of an effort to undercut Washington’s longstanding alliance with the Saudi kingdom.
In the meantime Beijing is refusing to pull back from purchases of Russian energy. Xi was talking up the chances of forging a closer partnership with Moscow on energy supply last week, while the state media has been celebrating the completion of the newest section of a major pipeline that carries Russian gas to customers in China (scheduled for completion by 2024, it will channel 38 billion cubic metres of gas on an annual basis).
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