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Oil Price War and China - Barış Sanlı

When it comes to lower oil prices, China is well-positioned to take advantage of decreasing import deficits and consumer toll. However, for the last decade, it was custom to hear that “World’s economic gravity is shifting to Asia or East.” In such an environment, China is not just a simple consumer paying for the oil bill, but it has broader implications beyond its borders.

Starting from the most apparent result of low prices, China will benefit. By increasing imports and stock levels, it has a degree of control on the slippage of price. Oil is also related to other commodity prices. Lowering of these commodity prices in the short run mixed with government support for the economy is a kick for the virus hit economy.

China is also one of the biggest oil producers. It is producing close to 3.8 million barrels/day. We are not sure how much the Coronavirus hit that production. However, China was producing 4.3 mb/d in 2015, and its production has been recently stabilized. The problem with this production is its cost. Rystad energy vice president claims the cost for Chinese production is 41$/b.

Oil-producing countries subsidize their essential services(like food) through oil revenues. Both oil consuming and producing countries generally lend a helping hand to their oil and gas industry during these low oil prices. So with low oil prices, the Party has to help upstream state-owned enterprises.

Sinopec, PetroChina, and Cnooc are expected to increase spending despite losses. According to Bloomberg, China’s biggest three oil producers raised their spending %18, but PetroChina’s shares fell 20% when Asia Energy Index rose %6. It is just plain economics. Low prices hit the high-cost producers first.

Chinese President Xi Jinping, like any other developing country, is aiming for energy and hence oil self-sufficiency. Price war will hit self-sufficiency targets, national oil companies, and high-cost production fields. Assuming prices stay low for some time, its impact may be more structural. It may also delay the Chinese shale revolution to come for some time.

The other problem is the secondary effects of Chinese expansion. China has given resource backed loans to some prominent resource-rich countries. Venezuela, Brazil, Angola, DRC, and the Republic of Congo are the receivers of such credits, according to The Chinafrica Project. These repayments of these loans are now on the riskier side than before.

Regarding natural gas prices, the effects are complicated. Most of the US shale production was producing associate gas. Well closure and decreasing oil production will support gas prices. Low oil prices will impact LNG and long term contracts differently. IGU report does not provide details about Chinese contract space, but oil-backed contracts are still relevant. Thinking about US-China trade deal and removal of Chinese tariffs on US LNG, if Henry Hub prices increase, LNG cost is expected to increase. Overall the result will be mixed.

The biggest problem is regarding the third country. Wall Street Journal published a story regarding why Coronavirus has hard hit the Qum city in Iran. They claim it on close Chinese collaboration and Chinese projects around that region. If low oil prices hit these already struggling oil-exporting economies, most of the Chinese projects may need a rethink.

Another interesting development was about freight rates. After Saudis cut the crude prices, there was a rush in demand for tankers. At the very least, in a contango market, you store oil until prices increase. China’s biggest oil trader Unipec is trying to cancel some cargoes due to spike in freight rates. Tanker charter costs nearly tripled with the Saudi price attack.

Therefore the whole situation is mixed. China may recover earlier than western economies. The stimulus package may bring back demand faster than anticipated. But China is not an island anymore; it is very close to the heart of the global system and has connections with the whole world. Just a simple oil price import calculation will be an underestimation of broader impacts.

In a country dominated by state-owned enterprises, the effects of low oil prices from the governmental level to consumer level has varying results. But the primary impact assessment should be made regarding Belt and Road Initiative and its future.

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