There are already signs that China's appetite for U.S. oil is rising, with Kpler estimating March arrival at 23.61 million barrels, up from 6.76 million in February and 8.65 million in January. China's imports from Brazil are estimated by Kpler at 24.1 million barrels for March, up from 21.06 million in February and the highest in two years. The overall picture that emerges is that if Aramco expects a strong increase in China's crude demand, it must be expecting a fantastically strong outcome if it also expects to sell increased volumes of its own higher-priced oil. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHIC=Traffic congestion index in major Chinese cities: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Jacqueline Wong)
Messaging: clyde.russell.thomsonreuters.com@reuters.net)) (The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Feb 9 (Reuters) - The surprise
increase in the price of Saudi Arabian crude oil for
March-loading cargoes is being viewed by the market as a bullish
signal that Chinese demand is ramping up as the world's biggest
importer reopens and stimulates its economy.
There are certainly increasing signs of revival in China's
fuel demand, with passenger flights and road traffic rising
strongly and indications that the country's huge refining sector
is accelerating processing rates.
It seems quite possible that China will be importing more
crude in coming months, but the question for Saudi Aramco and the broader oil-trading community is whether they
will be buying relatively expensive Saudi oil, or whether
Chinese refiners will successfully source cheaper alternatives.
Aramco, the state-controlled oil producer, raised the
official selling price (OSP) of its flagship Arab Light blend
for Asian customers for March cargoes by 20 cents a barrel to a
premium of $2.00 over the regional benchmark Oman/Dubai quotes.
The increase defied refiners' expectations for a 30 cent a
barrel cut to the OSP for March-loading cargoes, amid signs that
actual physical demand in China was lagging behind the bullish
view.
If China's physical demand does accelerate from March, it
may prove Aramco made the correct call in raising its OSP.
But it also makes it more likely that Saudi oil will become
less sought after by refiners, not only in China but also in the
rest of Asia, the continent that takes about two-thirds of the
kingdom's exports.
Saudi crude is sold under long-term contracts that typically
allow for variations in the volumes sought by refiners, or
offered by Aramco.
This allows Saudi Arabia to restrict exports if it aims to
boost global prices, but it also allows refiners to take smaller
volumes if they see demand for refined products slipping, or if
refining margins make processing crude uneconomic.
Let's assume the bullish China story is valid and refiners
want to boost arrivals in April and May, which is when
March-loading cargoes from Saudi Arabia would arrive at Chinese
ports.
By raising its OSP for March-loading cargoes, Aramco has
ensured that its crude will be relatively more expensive than
other grades.
This provides an incentive for Chinese refiners to maximise
volumes from other producers that offer spot cargoes.
These include West African producers such as Angola and
Nigeria, the United States and Brazil, but most importantly,
from Russia.
China has already been buying increasing volumes from
Russia, so much so that Russia has displaced Saudi Arabia as
China's top supplier in several recent months.
This is because Russian crude is now being offered at steep
discounts as European and other buyers such as Japan end imports
as part of efforts to punish Moscow for its Feb. 24 invasion of
Ukraine.
China imported 2.03 million barrels per day (bpd) from
Russia in January, according to Refinitiv Oil Research data, up
from 1.52 million bpd in December.
This made Russia the top supplier to China, overtaking Saudi
Arabia, with January imports of 1.77 million bpd from the
kingdom.
It's likely that Chinese refiners will first turn to Russian
crude if they are boosting imports, as will refiners in India,
Asia's second-biggest oil importer.
FUEL OIL
Another factor to consider is that China's independent
refiners may turn to importing fuel oil instead of crude,
especially since Russian oil products were banned by European
Union countries from Feb. 5.
While China is a net exporter of refined fuels, some
refiners have the ability to process fuel oil into higher value
products such as diesel and gasoline.
Already flows of Russian fuel oil to China have increased
sharply, with data from commodity consultants Kpler showing
China imported 3.89 million barrels from Russia in January,
which was a record high.
This is set to be surpassed this month, with Kpler tracking
seaborne arrivals of Russian fuel oil in China at 6.75 million
barrels.
It appears that China is already buying more Russian crude
and fuel oil.
The question then becomes if China's rising demand exceeds
what it can source from Russia, where will it turn to next?
U.S. crude is currently cheaper than Middle East grades,
which tend to price in tandem with moves in the Saudi OSPs.
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