China may lean on Russian oil due to war in Middle East
The crisis in the Middle East is threatening to draw China even closer to Russia, as Beijing faces the risk of losing cheap Iranian oil supplies and prolonged turmoil in energy markets.
Source: Financial Times
Details: China is the world's largest importer of oil and gas and receives 13% of its crude oil imports from Iran. Overall, one-third of China's oil and 25% of its gas imports pass through the Strait of Hormuz, traffic through which has almost stopped after US and Israeli strikes on Iran plunged the region into crisis.
As the conflict expands across the Middle East, Beijing is facing an unprecedented test of its long-standing economic security strategy and efforts to reduce vulnerability to energy shocks.
Experts and industry representatives say that Chinese leader Xi Jinping's government is likely to first try to deepen ties with Russia despite concerns about excessive dependence on its northern neighbour. Russia is already the biggest supplier of crude oil to China, accounting for 20% of imports.
"Deepening energy ties with Russia will be one of the big takeaways of this – both crude and gas," said Neil Beveridge, who leads research on China's energy sector at Bernstein in Hong Kong. "If Iran turns into a more pro-Western state, or they thought it was going to be unstable for a long time, it will push the alliance between Russia and China even closer."
China's Foreign Ministry on Tuesday condemned the US and Israeli strikes, calling for "all parties to immediately cease military operations, avoid escalating tensions and ensure the security of the Strait of Hormuz". "China will take necessary measures to protect its own energy security," the ministry added.
For many years, China has been buying large volumes of Iranian crude oil. This relationship has helped Tehran stay afloat and has provided independent Chinese refineries, known as "teapots", with discounted oil, which was often transferred and relabelled as Malaysian blended oil to evade US sanctions.
Background:
- Russian and Iranian oil producers have offered increasingly larger discounts, competing for the same limited pool of Chinese buyers after India stepped back from purchases.
- Israel and the US carried out strikes on Iran and Lebanese Hezbollah on the morning of 28 February.
- After that, Iran attacked Bahrain and the Arab Emirates and also blocked the main artery for Middle Eastern oil supplies – the Strait of Hormuz.
- Brent crude oil, a global benchmark, jumped by 13% to above US$82 per barrel at the opening of trading on Monday 2 March and oil markets are preparing for prolonged volatility and ongoing disruption in the Strait of Hormuz.
- A refinery in Ras Tanura in Saudi Arabia stopped operating after an Iranian drone attack.
- The Stena Imperative tanker flying a US flag was attacked in the port of Bahrain: a fire broke out on board but crew members were not injured.
- Qatar stopped liquefied natural gas production after two Iranian drones struck energy facilities belonging to the state-owned QatarEnergy.
- India's state oil refiners and government officials agreed upon an action plan due to the conflict around Iran, which has nearly stopped oil flows through the Strait of Hormuz, and are now looking again at Russian crude.
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