Russia’s plan to reduce oil production by 500,000 barrels per day in retaliation for sanctions, if kept beyond June, will tighten the market, exacerbating the deficit in the year’s second half.
The reluctance of OPEC+ to intervene and fill any gap resulting from it, combined with a significant increase in demand following the reopening of China, is a more than favorable mix for a price increase.
Although a nuclear deal with Iran seems highly unlikely, there is still a wild card on the supply side. Iran could increase its production by more than one million barrels in the early days of the deal. It could raise its daily output to around 2.5 million relatively quickly in the 12 months following a potential nuclear deal.
Another longer-term element could also play a role. The rapprochement between Iran and Saudi Arabia following a visit of a high-ranking Chinese official to Saudi Arabia could be bad news for the planet and good news for oil holders.
The Saudis have been trying to open up China’s oil refining industry for decades, attempting to buy stakes as a beachhead to supply more oil to the People’s Republic. It’s a well-worn strategy: the Saudis have done the same on other major oil markets, investing in refiners from Japan to the U.S. to South Korea. In exchange for their equity, the Saudis ensure a steady demand for their oil. In China, however, the Saudi strategy had not fared as well. So far, Riyadh has only held a 25% stake in a 300,000 bpd refinery in Fujian province, a project dating back to the mid-1990s.
Beijing was not particularly keen on letting foreigners run its oil sector.
Last Sunday, state-owned Saudi Aramco announced the long-delayed construction of a new 300,000 bpd refinery in China. Monday, Aramco announced it would buy a 10% stake, worth $3.6 billion, in Rongsheng Petrochemical, co-owner of China’s largest refinery, with a capacity of 800,000 bpd.
After dropping its Covid Zero policy, China’s oil demand growth is set to accelerate. CNPC said consumption should average 756 million tonnes in 2023. We are close to the peak consumption announced for 2030 at 780 million tonnes. In the medium-term, oil would be privileged, which could boost the global supply for the next few years.