China is in the sweet spot of oil sanctions in Russia

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Workers are seen near pumping jacks at a China National Petroleum Corp (CNPC) oilfield in Bayingol, Xinjiang Uyghur Autonomous Region, China August 7, 2019. REUTERS/Stringer/Files

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LONDON, May 19 (Reuters Breakingviews) – China is in a pretty good position when it comes to the global energy upheaval. Cheap Russian crude hit by a Western boycott is heading to Asia, but the rise in the world’s biggest importer has been more modest compared to India. And in the persistent absence of a European embargo, buyers like Italy keep grabbing it. The result is that Beijing is likely to buy more.

Politicians in Washington had warned they were prepared to shut down Chinese firms such as chipmaker Semiconductor Manufacturing International Corporation (0981.HK) if they sabotaged sanctions designed to pressure President Vladimir Putin. read more Beijing has shown sympathy for Moscow and refuses to call the invasion a war. Oil lubricates its tightrope: With the exception of Saudi Arabia, Russia is China’s largest source of oil. Read more

So far, India’s surprisingly aggressive bargain hunting has diverted much of the attention. The equally energy-poor country is home to Reliance Industries (RELI.NS), owner of the world’s largest refining complex, and has been scooping cut-price Russian Urals crude at record speed since the start of the war. Daily shipments hit 674,000 barrels last month, more than doubling from March, according to S&P Global’s Commodities at Sea. Russian daily shipments to China, meanwhile, rose just 10% to 781,000 barrels.

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Some European countries, despite Brussels’ decision to ban in six months, are also dragging their feet. As demand in Germany slumped, imports of Russian crude from Italy, for example, jumped 40% in April, according to S&P data.

This gives some cover to the People’s Republic. Russian shipments factoring in freight and insurance costs were drawing discounts of $8 a barrel or more against Brent, according to Bloomberg. China’s Shandong Port International Trade Group, which handles around a quarter of the country’s crude oil imports, has secured a rare Russian shipment that will arrive this month, Reuters reported.

Other Chinese purchases should follow. About 650,000 barrels of Russian crude oil per day that were previously shipped to developed economies like the EU could be replaced by similar qualities and volumes from the Middle East that are now mainly destined for China and the United States. India, says energy consultancy Wood Mackenzie. While breaking long-term contracts for opportunistic gain would normally be a business mistake, high energy prices mean Saudi Arabia can likely divert supplies to Europe without financial impact. As Chinese demand recovers from nearly two months of Covid-19 shutdown, it will be hard to resist discounts from Russia.

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BACKGROUND NEWS

– Russian daily crude oil shipments destined for China rose 10% from the previous month to 781,000 barrels in April, the highest rate of the year, while those to India more than doubled to a record 674,000 barrels, according to S&P Global’s Commodities at Sea.

– Shandong Port China International Trade Group, a provincial government-backed commodity and oil trader, has secured a rare shipment of Russian crude oil for arrival in eastern China this month , Reuters reported on May 11, citing traders and a company statement.

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Editing by George Hay and Katrina Hamlin

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.



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