Saudi Arabia, partners turn down Chinese requests for extra oil

Saudi Arabia and its main Middle East OPEC partners are turning down Chinese requests for extra oil as they hold back fuel for their own refineries just as demand from the world’s biggest crude importer hits new records.

While the Saudi and other refusals for additional crude supplies may not be part of a new pricing strategy, the rejections to their biggest client help explain a 40 per cent rise in oil prices this year as Chinese importers have had to seek more oil from other suppliers in what analysts say is still an oversupplied market.

Senior Chinese oil traders told Reuters the Saudis have turned down requests from Chinaoil and Unipec – the respective trading arms of PetroChina and Sinopec – for extra cargoes of crude for May and June loadings, forcing them to seek supplies from producers in West Africa, Oman and Russia.

Saudi Arabia “used to provide as and if we asked for extra cargoes on top of contract during the first four months of the year, but not for May and June,” said a trader with one of China’s biggest oil importers on condition of anonymity as he had no permission to talk to media.

Another source with a Chinese refinery that takes Saudi oil said Saudi heavy crude was “a bit tight” in May and June.

Reuters pricing and trade flow data show a 40 per cent rise in Brent crude since January has coincided with a more than 10 per cent fall in overall Middle East supplies to China, although in historical terms they remain high.

“Our analysis shows that Saudi flows to China have fallen quite a bit in May and their overall market share in China has also fallen,” said Yan Chong Yaw, Director of Thomson Reuters Oil Research and Forecasts in Asia.

The research group’s latest China crude report shows Saudi Arabia’s share of Chinese imports dropped to just over 30 per cent in May from 36.5 per cent in April.

Saudi Aramco, which was not available for comment, had already reduced contractual supplies to some Japanese and South Korean customers in April.

The trader with one of China’s big importers said requests for more crude to Kuwait and the United Arab Emirates – Saudi Arabia’s closest partners in the Organization of the Petroleum Exporting Countries (OPEC) – were similarly turned down.

PetroChina and Sinopec officials were not available and seldom comment on trading activity.

With imports of 7.4 million barrels per day (bpd), China overtook the United States as the world’s top crude oil buyer in April.

NEEDS OF THEIR OWN

Behind the stingier responses to requests for more oil lie mostly domestic factors. Saudi Arabia has traditionally been an exporter of crude oil but an importer of refined products.

That’s changing. Its new 400,000 bpd Yasref refinery became fully operational in April, taking in Saudi heavy crude oil to produce and export petroleum coke, diesel and gasoline.

Saudi Aramco started up its Jubail refinery of the same size last year and also plans to build a third 400,000 bpd facility by 2018.

Other Middle Eastern producers such as the UAE’s Abu Dhabi National Oil Co are also ramping up refineries, and the region is entering its peak burning season in which it uses more crude to generate power for air-conditioning.

“Over the summer, Middle East producers, particularly Saudi Arabia and Abu Dhabi, will have limited additional barrels for sale as new refineries continue their ramp up and increased summer burn absorbs supply,” said U.S.-based research and analysis provider Pira Energy.

Supplies of heavy grades have also been tightened by the shutdown of two fields jointly operated by Saudi Arabia and Kuwait – the Khafji in October for “environmental issues” and the Wafra last week for maintenance amid a land dispute – taking nearly 500,000 bpd of oil out of production.

Asian customers have as well been wary of the quality of Iraq’s new Basra Heavy grade and trying to switch to other crudes, according to industry sources.

Despite turning down some Asian requests, Saudi Arabia and its Middle East allies are still keen to meet as much Asian demand as possible.

The refusals come weeks after veteran Saudi oil minister Ali al-Naimi visited Asia and said demand for its oil was strong, but that Saudi Arabia’s record oil output of over 10 million bpd was ready to meet the needs of its clients.

Naimi was the driving force behind the OPEC decision last November to keep output unchanged, refusing calls to cut production so as not to lose vital market share in Asia to rival producers, but triggering price falls of over 50 per cent to under $50 a barrel by January.

While Saudi Arabia’s currency reserves mean that it can live with lower prices for years, Deutsche Bank estimates that the government needs a price of over $100 to balance its budget.