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Analysis: China to remain a battle ground for Saudi Aramco, Russian crude suppliers in 2020

The battle for next year’s Chinese demand pie between two major crude oil producers Saudi Arabia and Russia will likely heat up over the coming weeks, with China’s state-run refineries eager to renew 2020 term supply deals with the OPEC kingpin, while independent refiners continue to favor Siberian oil.

China has been relying heavily on Saudi Arabia and Russia for its refinery feedstock requirements over the recent years, with both producers constantly switching between them the top supplier position to Asia’s biggest energy consumer.

Russia was the winner in 2018 as China imported a total of 71.59 million mt from the non-OPEC producer last year, more than the 56.73 million mt it received from Saudi Arabia.

However, the Middle East producer is holding pole position as of the first three quarters of 2019, with China receiving 59.71 million mt of Saudi crude over January-September, compared with 55.69 million mt from Russia, according to the latest data from General Administration of Customs.

China's top crude suppliers in Jan-Sep

It’s difficult to foresee which of the two producers would take the top supplier status in 2020 as Saudi and Russian barrels remain essential diet for both state-run and independent refineries, making up a significant portion of their crude slate, industry and market sources said.

“The only notable difference is that state-run companies tend to favor Saudi barrels, while independent refiners strongly prefer Russian … overall it’s neck and neck though,” a sweet crude trading manager at state-run, Beijing-based Chinaoil said.
2020 TERM SAUDI CRUDE

Saudi Arabia got off to a flying start as it was quick to secure supply outlets for 2020.

Among the most notable deals signed in recent weeks, China’s Norinco Huajin refinery in northeastern Liaoning province will continue to import around 10 million barrels of crudes from Saudi Aramco in 2020, a company source told S&P Global Platts on Saturday.

The term supply volume for 2020 will be steady from this year’s contract, the company source said. Crude grades for next year’s term supply consist mostly of Arab Light and Arab Extra Light, but these grades can be adjusted if necessary, he added.

The refinery will take about 800,000 barrels of Arab Extra Light in November, and another 1 million barrels of the same grade in December, which probably will be the last cargoes to finish the term supply contract for 2019.

Chinese demand boosts Russian price differentials

Of the total term contract volume for 2019, Arab Extra Light accounts for about 90%, while only 1 million barrels of Arab Heavy has been lifted for the year, the source said.

“Arab Extra Light suits our units … Arab Heavy is similar to [Iraq’s] Basrah Light, which we already have quite a lot of supply,” he added.

Arab Extra Light has an API gravity of around 34 and sulfur content of 1.8%, while Arab Heavy has an API of around 27 and sulfur content of around 2.5%.

According to the source, Saudi crude will account for about 20% of Norinco Huajin’s total imports for next year, with the rest to be sourced from other Middle Eastern producers as well as West Africa and Russia.

Zhenhua Oil, the trading arm of state-owned parent company Norinco, mainly handles the refinery’s crude imports. Huajin holds a crude import quota of 8.3 million mt/year, together with another refinery under Norinco in the same city.
RUSSIAN ESPO DEMAND

Chinese independent refiners will likely continue to show strong affection for Far East Russian ESPO Blend crude next year due to the grade’s close proximity and its rich middle-distillate yield.

“China has been and will favor Russian crude for one very obvious reason — close proximity,” the Chinaoil trading manager said.

Spot premiums for ESPO crude hit a record high of around $9/b against Dubai in mid-October, reflecting Chinese independent refiners’ upbeat demand for the medium sweet grade in recent trading cycles.

Multiple Chinese refiners, as well as other Asian buyers recently turned to short-haul Russian supplies as soaring logistics costs disincentivized long-haul crude shipments. Global freight rates spiked during the second half of October following US sanctions on the affiliates of China’s Cosco Shipping Co.

In addition, China’s independent refiners were expected to increase their ESPO procurement in Q4 and Q1 as it is a preferred feedstock to produce low pour point gasoil in winter, Platts reported previously.

ESPO Blend was the most favorable crude oil grade to China’s independent refineries in October. ChemChina and Lijin Petrochemical were the main buyers of the medium sweet grade, taking 400,000 mt and 300,000 mt, respectively, in the month.

Overall, the independent refining sector received 18.11 million mt of ESPO crude over January-October, sharply higher than the 4.95 million mt of Saudi Arab Medium crude received during the period, Platts data showed.
Source: Platts

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