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ANALYSIS

Chinese oil majors in talks to raise bargaining power: report

DUBAI, July 2, 2020

Four of China’s major state oil companies are in talks to enhance the bargaining power and avoid bidding wars for key crude oil grades by exerting pressure on exporters for more favourable terms, a report said.

The long deliberated crude oil buying consortium is made up of the Chinese big four state oil companies – China Petroleum and Chemical, PetroChina, CNOOC and Sinochem Group, reported Mitsubishi UFJ Financial Group (MUFG), a leading financial services company, citing Bloomberg.

Initially discussed in 2019, the recent Chinese crude buying spree due to lower oil prices has been instrumental in supporting global crude oil prices, with tanker arrivals imply a three million barrels per day (b/d) of extra crude oil imports vs. last year's level.

“We view that it is conceivable that China goes a step further to eventually include independents in Shandong – the country’s hub for independent oil refiners,” MUFG said in the report.

While global oil markets have Opec+ on the supply side, the proposed Chinese oil consortium, will gain significant purchasing and bargaining power on the demand side. The consortium, which has the blessing of the Chinese central government, is set to collectively issue bids in a phased approach, starting with Russian Eastern Siberia-Pacific Ocean (ESPO) crude grades in the spot market as early as next month.

Should this consortium prove successful in garnering more favourable terms in long-term offtake agreements, then it is entirely feasible to assume that other Asian importers may be tempted to follow suit and club together to form other purchasing blocs.

The initiative could transform China from its price taker position and could reshape how China's future crude purchases could be conducted going forward. Granted this is not the first time the Chinese government and its oil companies have acted to establish a "made-in-China" lower oil price.

From a historical perspective, market conditions in times of oversupply dictates that it actually works in the opposite direction – facilitating competition for market share has broadly been the optimal way to assure lower prices as the market continues to expand.

That's conceivably a major challenge. Expectations are that Chinese real oil demand growth this year may be less than 300,000 b/d in 2020, whilst the sheer velocity of Opec+ cuts has demonstrated the resilience the group continues to command in its oil market management on the supply side. – TradeArabia News Service




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