LONDON: A big question ahead of the oil producers’ meeting in Vienna next week is whether buoyant Chinese demand will continue as crude prices drift higher, experts told Arab News.
Chinese oil imports have surged in 2017 with the authorities increasingly building up the Asian country’s strategic petroleum reserves as a cushion against future energy shocks, said Max Hess, a geopolitics analyst at London-based AKE International.
Cited in the Financial Times, Kristine Petrosyan of the International Energy Agency (IEA) said that since 2015, most excess crude has found a home in China, either in Chinese strategic reserves or commercial inventories.
“Many factors affect the oil price, but Chinese demand is an important one,” said James Henderson, a senior research fellow at the UK’s Oxford Institute for Energy Studies.
Henderson said: “Chinese demand has been rising fast, and is a big part in the rebalancing of the oil market. But will China continue buying as much crude if the price goes to $65 per barrel? That is certainly going to be one of several important factors up for discussion in Vienna,” he said.
There is no doubting the importance of China in the global energy picture — it is the biggest importer of crude. An IEA report said: “China’s target is 80 per cent self-sufficiency … but the remaining 20 per cent involves the critical supply of oil where import dependence has doubled in the last five years.”
China is forecast to overtake US as the largest oil consumer around 2030, with net imports forecast to reach 13 million barrels per day in 2040 (IEA).
To underline the trend, Rosneft struck a deal this week with partner CEFC China Energy, a private company, to supply it with 61 million tons of oil over five years.
CEFC, an energy trader, could sell some of this crude on to foreign buyers, but much of it is expected to be used to meet domestic demand, said Hess.
He added: “Given CEFC's ongoing investment into numerous areas across the 'Belt and Road,' including in Russia as most recently seen through its $500 million investment into hydropower and aluminum firm En+,  controlled by Oleg Deripaska, it would appear likely that the deal will help deepen the relationship between the two countries.”
Russia is often the biggest seller on a monthly basis of oil into China, said Henderson. And Chinese demand has played “a big part in rebalancing the market, so the meeting in Vienna will have to look carefully at the maths,” he said.
But the issue that has the market on tenterhooks is whether the Vienna meeting will agree to an extension of supply cuts hammered out last year between OPEC and non-OPEC countries such as Russia.
These cuts, together with stronger Chinese and world demand growth, are also a key factor behind the cutting of world inventories — which have helped to bring the market towards some sort of balance, said Henderson.
In early October, during the first ever visit by a Saudi monarch to Russia, King Salman met with president Vladimir Putin who said at that time the supply curb deal could be extended beyond March 2018.
But the last thing OPEC and non-OPEC producers need is a price hike off the back of an agreement to extend the cuts deal further even as global GDP picks up.
That risks significantly dampening demand, and/or bringing on tonnes of extra US shale as American producers jump to take advantage of higher prices — leading, in time, to another glut.
Henderson reckoned an oil price of around $60 per barrel — against today’s $62 — was about right, but that $50 would hit Saudi and Russian budgets. On the other hand, $70 or $80 could be the tipping point at the other end.
But to what extent does Russia want to extend the cuts agreement? Russian oil executives have been reported to be lobbying the Kremlin to block an extension to allow Russian energy firms to exploit the more benign pricing environment — well up on the $40 recorded since 2014.
That said, Henderson thought Russia would go with the OPEC consensus in Vienna, not least because of King Salman's visit to Moscow last month, and the improvement in relations between the two countries.
“The incentive is there for both countries to achieve a market where supply and demand are in tandem,” said Henderson.
Vienna, he added, was also about Russia’s broader foreign policy in the Middle East, and not just about oil.
“Russia is everywhere in the Middle East at the moment — Assad [Syrian president] has been in Moscow, as has the Saudi King, while Rosneft is in Kurdistan.”
Russia won’t want to upset the applecart as the country’s Middle Eastern geopolitical interests are a critical factor, said Henderson.
“Russia knows the relationship with Saudi is important, as well as with others in OPEC.
“Besides, a row with OPEC would send the oil price into a dive, and that’s not in anyones interest,” said Henderson.