By Irina Slav
When President Donald Trump on Sunday said the United States was “locked and loaded” to respond to the drone attacks on Saudi oil infrastructure, many smelled war. Even though on Monday Trump backpedaled and said he did not want a war, the worry about an escalation in the Middle East remains. And one big loser from such an escalation would be China.
Following the attacks on Saturday, Brent crude briefly jumped to over $70 a barrel before retreating to $68 at the time of writing. In China, crude oil and refined product futures soared yesterday, as refiners rushed to stock up. According to market research company JLC, every price increase of $5 in Brent will inflate costs of imported crude for independent refiners by about $40 per metric ton. That’s quite a shock to deal with. And it could get worse.
China has pledged $400 billion in investments in Iran’s oil, gas, energy infrastructure and transport industries over the next 25 years, Kenneth Rapoza noted in an article for Forbes yesterday. This is a major commitment aimed at securing a much needed future oil and gas supply for China whose domestic production cannot come close to satisfying its growing needs. For Iran, it is a way to continue making money from its oil despite the U.S. sanctions. The commodities will be priced in yuan and other currencies that China has reserves in. However, if the U.S. or Saudi Arabia decide to act on their conviction that Iran was behind Saturday’s attacks and target oil fields, “it might be setting a Chinese investment on fire,” Rapoza writes.
The drone attacks on the Khurais oilfield and the Abqaiq oil processing facility took an estimated 5.7 million bpd in production capacity off the market, according to initial estimates. Oil data analytics firm OilX, however, has estimated the cumulative loss for the three days to Monday at some 12 million barrels. Saudi Arabia has enough oil in storage to cover 10 days of exports at a rate of 7 million bpd, OilX analysts note, adding that it may speed up the restart of production in the Neutral Zone with Kuwait to cover for losses.
A loss of 12 million barrels in supply, albeit temporary, is enough to shake markets and send prices higher. But for China, this is the smaller problem. The bigger one is retaliation. The Houthi rebels in Yemen were quick to take responsibility—and boast—about the attack, but the U.S. and Saudi Arabia have blamed Iran. Whether or not they are right is irrelevant, Forbes’ Rapoza says. It’s the fact that they claim it was Iran behind the attacks that could, besides a retaliatory attack, lead to a further tightening in U.S. sanctions, with China suffering the consequences alongside its ally.
Others have got burned already, Rapoza recalls. BNP Paribas got stung with a $9-billion fine for violating international sanctions against Iran a few years ago. Total, the French supermajor, had committed several billion in investments into the development of the South Pars gas field, but had to pull out of the country when Trump reimposed the sanctions on Tehran. The company left to take care of the field was China’s CNPC. Yet it, too, later suspended all work on the field for fear of suffering a sanction penalty.
China is perhaps Iran’s biggest creditor. It stands the most to gain if pressure from the United States is lifted and the most to lose if this pressure is intensified. For now, the situation is unfolding in the latter direction.
By Irina Slav for Oilprice.com