Will China Forming Oil Buying Cartel End the Petrodollar?

Will China Forming Oil Buying Cartel End the Petrodollar? Author: Tom Luongo for Gold, Goats and Guns

China is building a buyer’s group (or cartel) comprised of its major state oil companies. I’m frankly surprised that this wasn’t already the case, since everything else is tightly controlled in China.

A report from Bloomberg (via Investing.com) states that:

Senior executives from China Petroleum (NYSE:SNP) & Chemical Corp., PetroChina Co., Cnooc Ltd. and Sinochem Group Co. are in advanced talks to iron out details of the plan, said people familiar with the initiative, who asked not to be identified as discussions are private and ongoing. The proposal has won the support of the Chinese central government and relevant industry watchdogs, the people said.

Since China is now the world’s largest importer of oil it only makes sense they would flip the switch and act as price makers rather than be price takers.

This makes perfect sense, economically, in the current environment as troubled oil exporters like Saudi Arabia continue to try and exert influence over the oil market.

The Saudis refuse to admit to themselves that their era of dominance over oil prices is, itself, over. As I noted in my blog from last week their attempt to gain market share through price slashing did nothing more than slash their own revenue to the bone, while making no new friends.

They shipped out 50% more oil and revenues plunged by 65%. They practically gave the stuff away in April. They had to. With the Riyal tied to the dollar they had to undercut Russian oil which trades in freely-floated rubles.

Because while China is certainly happy to pay less for oil, the knock-on effects of undermining its capital markets were and are far greater than the savings per barrel.

And that made them no new friends in the Poliburo.

That Crown Prince Mohammed bin Salman (MBS) acted to rashly in March I’m sure did not sit well with Chinese leadership. They clearly have no use for such an unreliable partner who refuses to take anything other than the U.S. dollar for its product.

To remind everyone, MBS threw his tantrum which locked up global markets after Russia’s refusal to agree to further OPEC+ production cuts in March. That precipitated the massive drop in oil prices which started the financial crisis.

So, it’s pretty obvious to me now that China seeks to further marginalize Saudi Arabia and the U.S. in the oil space.

The proof? Back to the Bloomberg article:

For a start, the group is set to collectively issue bids for certain Russian and African grades in the spot market, they said. While it’s unclear how the cooperation will evolve, the group represents refiners that import more than 5 million barrels of oil a day. That’s nearly a fifth of OPEC’s total output, which would make it the world’s largest crude buyer in theory.

Because here’s the rub, as always, China is looking for ways to deepen international use and liquidity of the yuan. Saudi Arabia and the U.S. want to continue use of the dollar as the main settlement currency for oil trading, the so-called petrodollar.

It is the petrodollar that provides the most inertia the world fights against to allow the rise of other currencies as settlement. Dollars are cheap to use, freely accepted and, for now, still a good store of (at least) medium-term value.

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