China Is Taking Advantage Of Western Sanctions On Russia

• Though oil prices are on the rise across the globe, China is seeing prices fall.

• Western sanctions against Russia have left Moscow willing to unload its crude at mind-bending discounts.

• China is taking advantage of the current geopolitical climate, buying up as much Russian oil as it can.

When the Trump administration slapped sanctions on Venezuela and Iran, China became the largest buyer of these countries’ crude oil despite repeated warnings by Washington officials—and not just warnings but action, too—that there is such a thing as secondary sanctions.

Now, China has also become an even bigger buyer of oil from the world’s biggest exporter, incidentally the subject of not just U.S. but European Union sanctions, too. And while oil prices for most of the world are rising, for China, they are falling.

Bloomberg reported this week that Iran has had to cut the price of its already discounted crude in order to be able to compete with Russian crude sent to China. The market is important for Iran, as it is one of very few where its crude is accepted amid the still continuing U.S. sanctions.

“The only competition between Iranian and Russian barrels may end up being in China, which would work entirely to Beijing’s advantage,” said energy analyst Vandana Hari, as quoted by Bloomberg. “This is also likely to make the Gulf producers uneasy, seeing their prized markets taken over by heavily discounted crude.”

This might hint at the possibility of discord within OPEC+, but then again, it will take a while for such discord to manifest itself. Meanwhile, Iran, per the Bloomberg report, is cutting its oil prices to some $10 per barrel below the Brent benchmark to compete with Urals, which has comparable properties and which Russia heavily exports to China.

The main buyers of both Iranian and Russian crude are the private refiners in China—the so-called teapots. Unlike the state-owned majors who need to tread carefully around sanctions and who have fuel export quotas, the teapots are oriented towards supplying the domestic market, and the recent wave of Covid lockdowns have done nothing good for domestic fuel demand.

Even before Russia joined the sanctions party, however, China was gobbling up Iranian and Venezuelan barrels that pretty much nobody else wanted. Beijing may very well be secretly celebrating the sanctions on Russia as they gave the country access to a lot more crude: Venezuela has limited production capacity, and Iran’s plans to boost its capacity hinge on a new nuclear deal with the West.

Industry commentators and analysts have been noting since March that Russia may not be able to place all of its oil exports that went to Europe before the war in Ukraine to another buyer. But this is not something that concerns China. China has emerged as the biggest buyer of all sanctioned oil, benefiting from discounted—often heavily discounted—crude, while the U.S. President is being forced to go to Middle Eastern producers and pretty much beg for more oil.

What is even more important is that while China is likely to continue getting all the volumes of Russian, Iranian, and Venezuelan oil it needs, there is a pretty good chance that Biden’s visit to Saudi Arabia will not result in additional oil output from the Kingdom or its fellow Middle Eastern OPEC members. Because of something called spare capacity.

The news, broken earlier this month by Reuters, that Saudi Arabia and the UAE may not have as much spare production capacity as estimated by agencies such as the EIA and the IEA, made substantial waves in the oil market, as it deepened fears that oil supply is not about to rise meaningfully anytime soon.

Oil prices continued rising, albeit tamed by growing fears of a global recession, making fuels even more expensive for drivers in Europe and North America. Not in China, though.

Fuel prices in China are currently on the decline after several months of increases. Yet compared to the increase in U.S. and EU fuel prices, China’s price increase is quite insignificant. It might have something to do with those sanctioned barrels coming in from Venezuela, Iran, and Russia.