Gulf Producers Keep Calm Amid Russia's Asia Push

Russian crude shunned by Western buyers is heading east in unprecedented volumes, displacing some traditional suppliers to the world’s only major long-term growth market. But despite grumblings in Opec-plus about the effects of deep Russian discounts on pricing, most of these suppliers are not overly concerned about market share yet. Indeed, observers see big Mideast Gulf exporters mostly guarding their coveted Asian market positions this year, thanks to China's demand recovery, an expected decline in Russian output, and the security provided by their term contracts. Not all is rosy: China’s imports of Saudi crude were flat last year, after fairly steady growth for the past two decades. Iraqi crude exports to India have been squeezed in the past six months. And some in Opec-plus have watched with concern the emergence of a two-tier pricing system for heavily discounted sanctioned and regular barrels. India, which will challenge China as the biggest growth market in the coming decade, has seen by far the biggest rise in imports of Russian crude, which jumped to 944,000 barrels per day in 2022's second half from just 44,000 b/d a year earlier, and then some 1.4 million b/d early this year. Iraq insists Indian demand for its own sour, high-sulfur crude remains strong. But Basrah crude exports to India were down by 117,000 b/d in the second half compared with the same period of 2021. It was a similar story for the United Arab Emirates, which also sells some of its crude on a spot basis.

China has managed to accommodate a sharp rise in Russian crude imports since last summer without cutting supplies from key Mideast Opec producers — despite a dip in its total crude imports in 2022 for a second straight year. Most affected by the influx of Russian barrels were arbitrage cargoes primarily from West Africa, as well as Latin America, the North Sea — and Iran. But Opec expects Chinese demand this year to recover by 590,000 b/d, and the importance China attaches to its relationship with Saudi Arabia — its top supplier alongside Russia — was underscored by President Xi Jinping’s recent visit to Riyadh. Likewise, India’s Oil Minister Hardeep Singh Puri has spoken of his country’s continued reliance on oil from the Mideast Gulf, a region that accounts for virtually all of its term contracts. There may not have been many calls for optional extra term volumes, but Saudi Arabia is seen as a more reliable long-term supplier than Russia. Moscow has gained market share in India mainly at the expense of Nigeria and the US. Sanctioned Iranian barrels, meanwhile, are particularly vulnerable to changing demand patterns in China, Tehran's only big customer, and face direct competition there from Russian crude. Andreas Economou, head of oil research at the Oxford Institute for Energy Studies, argues the expected fall in Russia’s output this year helps explain why the surge to Asia does not trouble top Mideast producers too much. “Within the group I think any tensions for now will be muted. I think they’re still in the wait-and-see mode,” he says.

Russia’s voluntary 500,000 b/d production cut and its plans to limit deep price discounts on Urals exports could also play well within Opec, which now expects Russian output to drop by 900,000 b/d this year. Moscow did not consult others in Opec-plus before deciding on the cuts, Energy Intelligence understands, but the move was not surprising and does not suggest Russia wants to leave the group. Opec-plus' concerns rise when Russian Urals discounts blow out to extreme levels — as much as $40 per barrel below Brent over the past year. For tax purposes, Moscow plans to set the discount at $34/bbl in April, narrowing in increments of $3/bbl to $25/bbl in July. The extent to which discounts also narrow for actual sales remains to be seen. Russian crude exports are unlikely to be affected by the production cut, whose impact is expected to fall largely on domestic refinery runs. Moscow also cannot afford to dent relations with its most important crude customers by making big supply cuts. Left with essentially three customers — China, India and Turkey — Russia could find it challenging to gain significant leverage over pricing. By contrast, Saudi Aramco last week was sufficiently confident about its position to hike its official formula prices for March-loading cargoes to Asia.