Chinese state-owned refineries are discussing the formation of a group to buy oil together, to increase China’s negotiating ability, and to avoid any wars between these organizations.
Talks are currently taking place between companies: China Petroleum, Kimcal Corp, Petro China, Konk and Sinochem at an advanced level to reduce differences and announce a detailed plan, according to Bloomberg’s informed sources, and these sources have hidden their identity because the talks are ongoing. The agreement garnered support from China’s central government and from industry regulators.
First, the group is preparing to offer purchase prices for the types of crude oil from Russia and Africa on the spot market (physical or physical). It is not yet clear how these entities will cooperate in the future, as the group represents refineries that import 5 million barrels per day of oil. What they consume is nearly a fifth of what OPEC produces, becoming the largest buyer of oil in the world, in theory. And that initiative has had its roots since 2019, and talk has increased about it in the light of the Corona virus, and historical cuts from OPEC + aimed at controlling the market.
China was the first epicenter of the virus, and consequently it was the first economy to reopen after the outbreak declined, and China embarked on oil, fuel and derivatives consumption at very high levels, which drove it to where it was before the start of the crisis. China has stimulated hopes for a quick V-shaped economic recovery in recent months, and domestic refineries have begun to increase purchases of Brazilian and Russian oil on the Fizical market, pushing prices up.
The combined state-owned refineries may apply for Russian oil trucks, ESPO, starting next month, according to the sources. The group may expand its dealings with non-state oil refineries, which call themselves teapots, according to the sources.
Bloomberg attempted to obtain a comment from the SNOK media office, but declined to comment. Petro China has not responded.
What does this mean for the oil market?
Buyers in the United States, China and Europe enter into long-term supply contracts with Saudi Arabia and other major producers, and producing countries face some difficulties this year, due to the Corona virus, and due to cuts, while consuming countries face a crisis in the disposal of oil in light of the violent volatility in domestic demand , Lower profit margins for refineries, and increased oil stocks.
Depending on the conditions included in these contracts, buyers can inform the sellers of the volume of oil they wish, the dates and the raw materials. The volume of oil shipments can be modified from the agreement of the parties, but the final decision is in the hands of the seller, not the buyer. National oil companies such as Saudi Aramco (SE: 2222) sell Saudi Arabia, ADNOC, and Iraqi Sumo oil at official prices announced monthly.
As for processing plants and import ports in India, force majeure is announced as part of attempts to prevent the reception of more contracted oil contracts, amid demand collapse due to closures. Soon, buyers from China and India sought to buy more Saudi oil after OPEC + production cut.
But China would like to have more voice than now, and have more influence in controlling oil volumes and the prices at which they buy, according to Bloomberg sources.
Will China succeed in this endeavor?
We infer here on previous attempts to form a union of oil refineries to control the price and the size of contracts, so that some strength is in the hands of the buyer, after concentrating in the hands of the seller only. We do not yet know the features of this group, but China plays a bigger role in the markets now, and it has an audible word in Asia. Several giant refineries have opened in China in recent years, including teapots, which import oil from everywhere, from Brazil to Russia.
Uni Beck, the trading arm of Sinopec, has been a critic of Saudi Arabia for controlling sales prices. In 2018, the company sought to negotiate contract sizes with Aramco, and a dispute between the parties ended.
If that initiative succeeds in China, this will be the largest in the market. In 2003, copper melters, including Jiangx Copper, and Tongling Nunvirus Mittal, decided to form a team that focused on imported copper. This group now consists of 10 melters, and is responsible for 80% of China’s copper imports.