Oil prices slipped Tuesday, over concerns of a sharp global economic slowdown, as well as oil supply disruptions.Brent crude is now down 30 cents or 0.5% to $66.73 a barrel, while US West Texas Intermediate crude is down 35 cents or 0.6% to $58.69 per barrel.
However, China is doubling down on purchases of cheap oil that other buyers are shunning due to U.S. sanctions.
The world’s biggest crude importer boosted imports from Venezuela and Iran last month from January, with the shipments costing the least since November 2017, data released on Monday by the General Administration of Customs show. Both of the OPEC producers are subject to separate U.S. sanctions that have squeezed their sales to customers across the globe.
While the U.S. has granted several buyers waivers from its sanctions to continue buying Iranian oil, the volumes they are allowed to buy are restricted. What’s more, other nations such as Japan are limiting cargoes to a minimum to avoid even the possibility of breaching America’s rules. China, however, has imported about 446,000 barrels a day on average since November, customs data show.
The Asian nation is said to have been allotted 360,000 barrels daily under the exemption, though that excludes the share of oil owed to Chinese companies that hold stakes in Iranian projects.
In Venezuela’s case, the Donald Trump administration’s sanctions only effectively block shipments to the U.S. and don’t restrict flows to other nations. Still, big buyers such as India’s Reliance Industries Ltd. have shied away from purchases to avoid potential repercussions.China buys more oil from Venezuela, Iran on cheaper cost.
“Increased purchases from Venezuela may very likely be due to cost concerns,” said Li Li, an analyst with Shanghai-based commodities researcher ICIS-China. If the import price is low enough, oil giant PetroChina Co. can easily make a profit by selling to independent refiners, also called teapots, at a higher premium, she said by phone.
China bought 2.03 million metric tons, or 531,000 barrels a day, of crude from Venezuela last month, 17 percent more than January and the highest since December 2017, the customs data show. Imports from Iran rose 22 percent from a month earlier to 1.96 million tons.
China’s purchases are also probably spurred by a shortage of so-called heavy oil, which is more dense and sulfurous than lighter crude. The squeeze has been exacerbated by output cuts by the Organization of the Petroleum Exporting Countries and its allies as well as the U.S. sanctions.
“As heavy oil gets more expensive, China of course wants to secure as much of cheap supplies as possible, especially from those who are friends with China,” Li Li said. With China’s refineries designed to process medium-to-heavy grades, supplies from the two nations at discounted price may be proving attractive to China’s state-owned giants.
The average price for Venezuelan supplies to China was about $46 a barrel, while Iranian shipments were worth around $60, both the lowest since late 2017, according to calculations based on customs data adjusted for exchange rate changes. Brent crude, the global benchmark, traded at around $67 a barrel on Monday.
PetroChina, the nation’s largest energy producer, resold Venezuela’s Merey crude at a premium of as high as over $5 a barrel against WTI in February and that spread widened to over $7 in March, according to an offer document seen by Bloomberg.
Meanwhile, Saudi Arabia has been signaling for weeks that it is and will be doing whatever it takes to rebalance the oil market by slashing exports and pumping well below its quota under the OPEC+ deal—despite US shale’s persistence.
Yet, while neither the Saudis nor OPEC would officially admit that they are aiming for higher oil prices or a specific price of oil, the combined efforts of the OPEC/non-OPEC group to withhold 1.2 million bpd of supply are targeting a tighter market—and higher oil prices.
Even if higher oil prices are indeed helping U.S. shale producers to pump oil at record levels, OPEC’s largest producer and de facto leader Saudi Arabia reportedly prefers higher oil prices rather than hanging onto its market share.
The Saudis are aiming for at least $70 a barrel Brent Crude because the Kingdom’s budget needs these higher prices, industry sources familiar with Saudi Arabia’s oil policies tell Reuters. And they may need even higher than that.
According to estimates from the International Monetary Fund (IMF), the Saudis need much higher oil prices for a budget breakeven in 2019—at $80-85 a barrel, Jihad Azour, Director of the Middle East and Central Asia Department at the IMF, told Reuters last month.
Oil at $80, however, is sure to draw harsh criticism from U.S. President Donald Trump, whose oil price ‘tolerance threshold’ appears to be Brent above $65. The latest tweet aimed at OPEC at the end of February called on the cartel “to take it easy”, when oil prices were roughly where they are now—at Brent around $66 a barrel.
Oil at $80 would also be the beginning of demand destruction at a time when economists and markets are already fretting about slowing economic growth in China and other major economies and the still unresolved U.S.-China trade dispute.
So while the Saudis are probably aware that they can’t afford to push oil prices to their budget breakeven, the goal, according to Reuters’ sources, is still above the current oil prices.
The last time Brent Crude traded at $70 or above was in early November last year, when prices were plummeting from the $80-plus levels from early October.
At that time, in the run-up to the return of the U.S. sanctions on Iran’s oil when Washington was promising zero Iranian exports, Saudi Arabia, its close Gulf Arab allies, and Russia had opened the taps to pump more oil to offset what was expected to be a severe loss of Iranian barrels.
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