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Russia’s oil sales to China hurt Saudi revenue despite increased demand

Despite oil prices maintaining a seven-week rally and crude demand expected to reach record highs in 2023, the burden of maintaining higher oil prices is pushing Saudi Arabia to the limit.
Saudi refinery

DUBAI - Even after OPEC powerhouse producers Saudi Arabia and Russia extended yet again this month oil production cuts until September, the weight of maintaining high prices is taking its toll on the kingdom’s goals for economic growth. 

Saudi Arabia’s production for September 2023 will be about 9 million barrels per day (bpd) according to the state-owned Saudi Press Agency (SPA). This includes the 1.6 million bpd agreed upon by OPEC Plus members in April, that extends until December 2024. 

“This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil markets,” the kingdom’s Ministry of Energy said in the SPA statement. Brent Crude traded at about $86.671 at 6:30 a.m. Eastern Standard Time on Friday, according to the Dow Jones subsidiary Market Watch. 

Oil had a seven-week rally, the longest streak in more than a year, reported Bloomberg on Thursday, with crude climbing about 20% since late June. In addition, oil demand is expected to reach record highs, increasing by 2.2 million barrels per day (mb/d) to 102.2 mb/d this year, according to the International Energy Agency (IEA) Oil Market Report – August 2023, released Friday. The report attributed 70% of the growth in demand to China’s surging petrochemical activity. 

This is all welcoming news for Saudi Arabia, but experts believe the kingdom faces ongoing obstacles. 

More oil in market

Matthew Bey, a senior analyst at the Risk Assistance Network + Exchange, said there are multiple varied constraints preventing Saudi Arabia from maintaining this desired oil price point in the future. 

“There is a higher amount of oil that’s entering the global market. The US is still somewhat resilient, also look at the oil production that has come online from Brazil, Guiana, etc.,” he told Al-Monitor. This is in addition to the anticipated economic slowdown and while the kingdom’s OPEC+ partner Russia is able to export oil at the Group of Seven nation’s price cap of $60 per barrel, a cap it exceeded in July to $64.41 a barrel, according to the IEA report. 

Although Saudi Arabia and Russia are working together to extend production cuts and maintain oil prices, the latter’s extended grasp of the market share given its narrower options is working against the kingdom. 

Russia can export to essentially six major consumers, with Turkey, India and China being the major three, said Bey, which impacts Saudi Arabia’s future revenues.  

“There is probably some concern from Saudi Arabia’s standpoint that long term, the market share on average that they would normally have might actually start to decline, or at least be peaking,” he added, as Russia becomes more protective of its customers during its restricted state. 

Despite Russia's competition for crude consumers, both countries need to continue to work together to maintain OPEC and its allies’ global market share and to have a better handle on oil prices long term, concluded Bey. This necessity is amplified by the added pressure from Western countries pushing for the reduction of fossil fuel usage globally.  

Amro Zakaria Abdu, an independent energy and financial service industry strategist, said the kingdom’s goal is to keep oil prices above $80 per barrel. 

“The consumption from China has not picked up at all as was expected, and as such, the Saudis are worried that oil might drop very fast and delay their plans for domestic, fiscal spending in their non-oil sectors,” he told Al-Monitor. Russia overtook Saudi Arabia as the top crude supplier to China in the first half of 2023. China imported 2.13 million bpd of oil from Russia during that period, while it imported 1.88 million bpd from Saudi Arabia.  

Chinese refiners requested less oil from Saudi Aramco in the last three months due to high oil prices and instead increased their supplies from the Americas and West Africa. Yet recent developments have worked in Saudi Arabia’s favor, as China is positioned to take about 40% more crude from the kingdom in September as a Chinese mega-refiner implements a new deal, reported Bloomberg on Friday. 

Saudi Aramco also informed customers in North Asia that they will receive full volumes of crude oil they requested for September, reported Reuters, quoting multiple unidentified sources. 

US bringing down the price

The other major force seeking to pull down oil prices is the United States, said Abdu, as it withdrew an offer to buy 6 million barrels of oil for the Strategic Petroleum Reserve on Aug. 1. Additionally, the Biden administration released a record 180 million barrels from the reserve last year to lower prices after the Russia's invasion of Ukraine, just as the US Energy Department bought back 6.3 million barrels in recent months. 

The US's largest draw from the reserve since the 1980s brought down the price, said Abdu, albeit minimally. The Biden administration said it will delay replenishing the reserves until prices reach $67 to $72 per barrel.

Hikes in US interest rates also put downward pressure on oil prices, he added. The Federal Reserve hike of a quarter percentage point in July coincided with a fall in oil prices of about 1%, according to Reuters. The 11th rate hike in the Fed’s last 12 meetings is additively reducing global oil demand, slowing economic growth, and increasing borrowing costs, particularly in countries whose currencies are pegged to the dollar. 

As a result, Saudi Arabia’s central bank increased its interest rate in July, making it more expensive to borrow money, which could offset the kingdom’s goal of attracting foreign firms. It also affects tourism and disposable income, Abdu told Al-Monitor. 

Saudi Arabia’s economy grew 8.7% in 2022 and led to the country’s first budget surplus in almost 10 years, largely due to global petroleum prices that averaged Brent crude at $100.94 per barrel, according to the Energy Information Administration (EIA). The US agency estimates that Brent will average $81 by the end of 2023. 

Other economic strains

Lower oil prices and the probability of prolonged oil production cuts have revised Saudi Arabia's gross domestic product growth downwards, reported Reuters in late July. 

Abdu said Saudi Arabia has taken on the burden of maintaining oil prices for the benefit of oil-producing countries with its voluntary production cuts, along with Russia — but continuing to do so would be a costly long-term solution. 

“That’s a lot of money. They are basically shouldering the burden on their own. The question is, how long will they be able to do that?” he added. 

Uplifting the kingdom as it carries this economic weight is its high credit rating, which was upgraded with a stable positive outlook (an A1 rating) in March by Moody and issued an A+ with a stable outlook in April by Fitch Ratings. 

“They still have that option to tap into the global capital markets, so that they can continue to spend money on all the mega projects they are doing whether it be in international sports, gaming, or any sector,” said Abdu, about how Saudi Arabia could issue bonds to maintain its liquidity in the short term.

He argued, however, that it will only get harder, given that continuously increasing interest hikes will decrease the kingdom’s competitiveness with other government funds, such as from the US, which currently has policy rates of about 5.4%, according to the US Treasury. 

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