Russia and Saudi Arabia both rely on oil sales to fund a majority of their budgets. In the last five plus years, China has become the biggest customer for both countries. In fact, China is the world’s largest importer of oil, though it could cut imports if it stopped adding to inventory (storage). China has stored so much oil over that half a decade, that it could practically halt all oil imports and get by just fine for a while. In other words, Vladimir Putin and Muhammed bin Salman need to stay in the good graces of Xi Jinping. This has global consequences, including for the United States.
Source: Forbes
Only Chinese authorities know for sure how much oil it has in inventory, but there are a range of estimates. Reuters estimated last year that China had 788 million barrels in its strategic petroleum reserve. That number did not include the large commercial reserves, even though nothing is truly beyond the reach of the government in a nominally communist country. WoodMac said in March of this year that China could reach 1.15 billion barrels of total inventory in 2020, that would mean almost four months’ worth of oil if China cut all imports and domestic production.
Let’s examine what might happen if China threatens to cut all imports from just one of those countries and does not replace that oil with imports from somewhere else. It would drop the global demand by a little under two million barrels per day immediately. China could make up for this cut in imports by drawing from inventory. This would send shockwaves through the speculative oil market. Oil prices would fall. That country whose oil was cut—whether it is Russia or Saudi Arabia—would be desperate to find new buyers and may have to undercut the market with low prices, thus further dropping oil prices. Therefore, the exporter that China targeted would suffer, but so would all oil producers, including United States firms. Yet, Russia and Saudi Arabia have the most to lose if China is upset with them.
The point of all of this is that when it comes to oil, Russia and Saudi Arabia are beholden to China. They need sales to China, but thanks to China’s inventory, China does not really need purchases from both of them. On the global stage, it would be hard for Russia or Saudi Arabia to take sides on any issue against China. That could prove significant in the near future as the U.S. and others delve into the origins of the coronavirus pandemic and as China and India continue their recent border face-off.
