China has become the world’s largest oil importer, and despite establishing the largely successful yuan-denominated oil futures, Beijing will have to grapple with an overlooked geopolitical and economic consequence as it seeks to quench its thirst for oil and gas.
As China relies more on both foreign crude oil imports and imported gas in the form of LNG and piped gas from neighboring countries, the outflow of petro-dollars or in this case petro-yuan will see the country contend with the decades-long dilemma that the U.S. faced; a massive transfer of capital to foreign oil producers.
Worse yet, for the U.S. at the time of its foreign oil import dependence, the transfer of funds was often to less-than-friendly Middle Eastern oil producers, including Saudi Arabia who in the 1970s and 80s could arguably have been called a quasi-friend or at least an ally of convenience. The U.S. needed Saudi oil as American oil production continued to decline while U.S. oil consumption spiked to unprecedented levels. For their part, the Saudis needed, and still do, the U.S. Navy’s 5th to keep open vital shipping lanes including the world’s most important maritime chokepoint, the Strait of Hormuz, to allow the export of massive cargoes of crude to foreign markets.
China’s insatiable oil thirst
China surpassed the U.S. in annual gross crude oil imports in 2017 by importing 8.4 million barrels per day bpd compared with 7.9 million bpd of U.S. crude oil imports. China had become the world's largest net importer (imports less exports) of total petroleum and other liquid fuels in 2013. New refinery capacity and strategic inventory stockpiling, combined with declining domestic production, were the major factors contributing to its recent increase in imports.
In 2017, an average 56 percent of China's crude oil imports came from OPEC producing members. This declined from a peak of 67 percent in 2012, while Russia and Brazil increased their market share of Chinese imports more than any other country, from nine to 14 percent and from two to five percent respectively. Related: Can India Break Its Oil Addiction?
Moreover, imports from Russia, which passed Saudi Arabia as China's largest source of foreign crude oil in 2016, totaled 1.2 million bpd last year, while Saudi Arabia accounted for 1.0 million bpd. OPEC countries, and some non-OPEC countries, including Russia, agreed to reduce crude oil production through the end of 2018, which allowed other countries to capture Chinese market share in 2017.
Of course, in the past decade, U.S. overreliance on Saudi and OPEC oil has been offset in large part due to the wonders of the U.S. shale oil and gas boom that has seen Saudi oil imports to the States reduced recently to multi-decade lows, not seen since the 1980s.
The question now is: Will China find itself in the same foreign oil dependence quandary as the U.S. did from the early 1970s until the past decade? All signs indicate that the answer to this question is a resounding yes.
The sheer size of China’s economy, its prolonged run of economic growth, its massive population and its own oil and gas production problems create a scenario that will not only make Beijing more reliant on oil from unstable or geopolitically volatile regions, including Iran, Nigeria, Saudi Arabia, and other OPEC producers, but also from Russia, particularly pipeline oil and gas imports from that country.
China needs U.S. oil & gas
These dynamics also point to the advantage that U.S. oil exports offer for not only China but the entire Asia-Pacific region. Security of supply must be implemented into Beijing’s oil import mix strategy, even if it is a tough pill to swallow for the country as it exchanges trade war barbs with Washington.
Not only do U.S. shale oil and LNG production offer enhanced security of supply, as well as a sophisticated regulatory system and developed pipeline infrastructure, there are also price incentives that are competitive over its oil and gas exporting rivals.
For starters, the price spread between West Texas Intermediate (WTI) crude oil and Brent crude and other global benchmarks presents an incentive for China and others to procure more U.S. light, sweet crude for its refineries. Even if some of those refiners are not configured to process light grades, it can be used as a blend with other crude types, yielding higher profitable finished products like jet fuel, gasoline, kerosene and others.
As far as U.S. LNG goes, the fact that exported American LNG is indexed to Henry Hub pricing is an also attractive selling point for U.S. supplies of the super-cooled fuel. Despite a recent pivot from longer tem LNG contracts to shorter contracts and pure spot trading, the fact remains that the bulk of LNG volumes sold in the Asia- Pacific region, which accounts for two-thirds of all global LNG demand, is still predominately tied to an oil-indexation pricing formula.
In November, China imported a record amount of crude oil from the U.S., some 289,999 bpd; admittedly a small market share in light of the 9.01 million bpd of crude which the Middle East imported that month.
Yet, U.S. crude's discount to Brent will continue to drive more American oil imports., particularly since that price spread is based on more barrels being pumped in the U.S., (amid higher global oil prices) which is projected to soon overtake Russia as the world’s top oil producer at 11 million bpd. Russia and OPEC members’ output, for their part, will likely hold steady or dip further if the OPEC/non-OPEC production cut is extended past 2018. Related: How Oil Hedging Could Cost Companies $7 Billion
U.S. oil production rose to a record 10.264 million bpd in February, the U.S. Energy Information Administration (EIA) said on Monday.
Growing Brent/WTI price spread
On Friday, the Brent-WTI price spread neared $7, widening further to encourage U.S. producers to export crude to customers overseas. In March, the spread stood at only $3 per barrel. Some of the price divergence not only comes from more U.S. output, but geopolitical worries, mostly from tensions in Syria, Yemen and the ongoing jockeying for position in the region between Riyadh and Tehran, even causing the Saudis to consider a pro-Israeli pivot in bilateral relations, also putting upward pressure on Brent and other benchmark prices.
Michal Meidan, head analyst for Asian energy policies and geopolitics at research consultancy Energy Aspects told CNBC late last year, "I think the U.S. certainly is poised to capture a lot of that growth. "There is a huge amount of interest in U.S. crude to Asia broadly but to China specifically."
All of this comes full circle as Beijing sends massive amounts of wealth to fill the coffers of foreign oil producers, in essence helping (in time) to offset the trade imbalances with the U.S. and others and in effect helping these producers wrest by geopolitical and economic leverage away from Beijing.
By Tim Daiss for Oilprice.com
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In regard to the "Chindia" region:
GNE = Combined net oil exports from (2005) Top 33 net oil exporters (BP + EIA data, total petroleum liquids)
CNI = Chindia’s Combined Net Imports (BP, total petroleum liquids)
ANE = Available Net Exports, GNE less CNI
Using the BP data base Chindia's Net (total petroleum liquids) Imports, or CNI, increased from 5.1 million bpd in 2005 to 12.0 million bpd in 2016, which I would round off to 5 and 12 million bpd respectively.
Following is a link showing my GNE/CNI chart for 2002 to 2011, using EIA data:
Note that the extrapolation (based on the 2005 to 2011 rate of decline in the GNE/CNI Ratio) shows the ratio falling to just below 4.0 in 2015, on track to approach 1.0 (the Chindia region theoretically consuming 100% of GNE) by 2030.
Using the updated data, the GNE/CNI Ratio fell to 3.8 in 2016, on track to approach 1.0 by the year 2033:
What I define as Available Net Exports (ANE, or GNE less CNI) fell from 40 million bpd in 2005 to 33 million bpd in 2016. This is the volume of Global Net Exports of oil available to importers other than China & India.