Russia and Saudi Arabia have been (relatively) quietly fighting for market share in China ever since oil prices started their downward spiral in mid-2014-now the battle is heating up, and teapot refineries are what could tip the balance.
Though the Saudis had historically been China's biggest oil supplier, Russia managed to take the top spot several times during that period, thanks to the so-called teapot refineries. This has now forced the Saudis to do something they've never done before-target teapots on the spot market in order to regain lost market share. Related: Why Saudi Arabia Will Not Win The Oil Price War
Teapot refineries rose to fame due to their greater processing flexibility as compared with state-owned Chinese oil giants. Last year, they finally won import quotas for crude, most of which they then export in the form of oil products.
Russia was quick on the uptake and until recently was the leading supplier to these teapots. Now, however, the Saudis have stepped up their game and have offered teapots spot oil contracts. That's very unusual for Saudi Arabia, which prefers to trade its oil on the futures markets and at a fixed price--but the stakes seem to be high enough to justify this move.
However, life is not all easy for the teapots, either. Last year, they faced tightened credit requirements from local banks, who got worried about falling returns. The independent refiners found a solution to this problem this year, when 16 of them agreed to ally in order to improve their purchasing power. Related: This One Number Just Changed The Outlook For Global NatGas
The China Petroleum Purchase Federation of Independent Refineries was formed in early March with the ambition of covering the whole chain of imports, processing and exports. According to shipbroker Gibson, teapots could come to account for 20 percent of all Chinese crude oil imports this year.
In March, the country imported a total 32.61 million tons of crude, up by more than one-fifth on the year. Over the first quarter, imports reached 91.1 million tons, up 13.4 percent on the year. Teapots were the driver of this increase, so it's understandable why they are drawing so much attention from the world's top two exporters.
And yet, they might prove a losing bet. Related: Big Oil Surprises Analysts, Is The Worst Behind Us?
Despite the new alliance, teapots are still in a worse position than the state companies when it comes to securing credits. Oil prices are climbing and this will additionally aggravate the situation for teapots. Of course, both Russia and Saudi Arabia could decide to sell at a discount. But how much of a discount can they feasibly afford?
Ultimately, it could prove to be a war of patience and financial resilience.
By all means, Saudi Arabia has the upper hand in the latter, but Russia has a history of being patient and it's used to tightening belts when times call for it, unlike the Saudis. Perhaps it could be a better idea for both to relax and look for other destinations of their oil, such as India. Before Iran gets there first.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
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