Sanctions bite, China swerves – and Opec’s cushion thins

Sanctions against Moscow are having an effect. Chinese imports of crude from Saudi Arabia, the UAE and Kuwait are rising as Beijing scales back supplies from Russia, my colleague Pramod Kumar reported last month.

This means that China was Saudi Arabia’s single largest export market in the third quarter and that in October the kingdom was sending 1.65 million barrels per day Beijing-wards.

Opec has been pinning its hopes on demand from the Chinese market to underpin flabby oil prices. The oil producers’ club has also pivoted to the (justified) notion of energy poverty in the developing world as a continuing driver of demand. But China remains important.

In September Beijing updated its “nationally determined contributions” to cut carbon emissions ahead of the underwhelming Conference of the Parties in Brazil. As our columnist Robin Mills wrote prior to the event, China is now the foremost player in global climate action.

Some had been predicting a pledge to cut 20 to 30 percent and that the Chinese Communist Party (CCP) would announce a date for peak emissions. A big promise would have been negative for crude because it would have meant a commitment to non-fossil fuels.

So what happened?

In a nutshell, the CCP’s commitments were not as whole-hearted as many had expected.

The CCP committed to cut by only between 7 and 10 percent by 2035 from peak, and to increase the share of non-fossil fuels to 30 percent of total consumption. So far, so good from a Gulf perspective.

But Opec members should not get carried away: the CCP has let it be known through other channels that peak demand is imminent. Total oil demand in the world’s manufacturing centre including all products is set to top out in 2027, a state researcher told a conference in Singapore. Thereafter it is expected to decline.

The CCP’s commitment to cutting emissions is real, despite ongoing investment in coal. This is because pollution at home is a hot button issue and one that can spark unrest; and because China recognises that climate change technologies – EVs and solar panels to name but two – are tomorrow’s technologies. It is not wrong.

Further reading:

• Robin Mills: Cop talks are no longer the main driver of climate action
• China buys more oil from GCC as US sanctions bite
• Frank Kane: China’s oil strategy keeps the world guessing

The CCP probably shied away from more ambitious targets because it recognised that hitting them would harm economic growth and because it did not want to be held publicly accountable for any shortfalls. In his column, Robin noted that Beijing does not yet have the political clout and will to lead on climate change.

Yet the CCP knows that dependence on oil imports is a leading strategic weakness. Most crude supplies must travel through the Malacca Strait. Beijing will aim to deny adversaries that obvious chokepoint and reduce crude import dependency as fast as it can without impacting growth.

The fact that oil prices – Brent at least – have remained above $60 per barrel this year is something of a miracle. The price has been sustained by a slower return of barrels to the market by Opec and by Chinese bolstering of strategic reserves.

But don’t rely on demand from China to keep it that way for much longer.