Raw material superiority: why the demand for Russian oil has grown in Asian countries

The International Energy Agency (IEA) has revised its forecast for oil demand in 2020. According to the organization’s report published on Tuesday, June 16, according to the results of the year, energy consumption in the world will decrease by 8.1 million barrels per day. Earlier, the IEA expected a decrease of 8.6 million.

Agency specialists improved their assessment against the background of weakened quarantine measures in a number of countries. According to experts, the gradual return of people and enterprises to work over time should lead to a restoration of global fuel consumption.

“It is believed that the most acute phase of the coronavirus pandemic has passed, so countries cancel restrictive measures and carefully restart their economies. As a result, demand for energy sources is growing, and investors are no longer waiting for the spring scenario to repeat when global consumption collapsed by 15-25 million barrels per day, ”said Mark Goikhman, TeleTrade’s chief analyst.

According to the IEA, the most active demand for oil is recovering in the countries of the Asia-Pacific region (APR). For example, in April, the level of hydrocarbon consumption in China almost returned to last year's figures. At the same time, in May, a sharp jump in demand for raw materials was also recorded in India.

“In April, Chinese industrial production grew by 3.9% compared to the same period in 2019, and in May, the growth rate accelerated to 4.4%. Such dynamics indicates a further improvement in the situation in the country's economy due to the manufacturing sector. A similar situation is happening in India. As a result of the rapid recovery, both states are increasingly in need of energy resources, ”said Goichmann.

It is curious that, as demand revives, Asian countries are more likely to buy oil from Russia. According to the analytical agency Argus, in the first five months of 2020, the share of Asia-Pacific countries among importers of sea lots of Russian raw materials of Urals variety reached 21%. At the same time, a year ago, the indicator did not exceed 7%.

According to analysts, China is most actively buying Russian oil. In April 2020, Russia became the largest supplier of energy resources to the Asian republic, ahead of Saudi Arabia. This is evidenced by the data of the Main Customs Administration of China. According to the department’s estimates, sales of Russian oil to Beijing increased by 17.7% compared to April 2019 and reached 7.2 million tons. At the same time, supplies of Saudi raw materials fell by 18% to 5.16 million tons. 

“Saudi Arabia canceled the previously granted discounts and raised its oil prices for buyers in Asia: an average of $ 5.6–7.3 per barrel. Thus, Russian oil has become more attractive to buyers in the region, ”Ivan Kapustyansky, Forex Optimum Leading Analyst, told RT.

Moreover, due to oil purchases from Russia, the Eastern partners are trying to compensate for the decrease in supplies from Iran and Venezuela, says BCS Prime economist Anton Pokatovich. The export of raw materials from both countries was limited due to the imposition of US sanctions on Tehran and Caracas.

“Oil supplies from Russia can be confidently called stable and safe in comparison with the import of raw materials from Tehran and Karax, for which US sanctions remain. Therefore, in addition to China, we also observe an increased interest in Urals in South Korea, Malaysia and Japan, ”said Pokatovich.

According to experts, amid still weak oil consumption in Europe, growing purchases of Urals in Asia could positively affect the state of Russia's budget. Recall, a record drop in global demand and commodity prices in the spring led to a sharp decline in revenues to the Russian treasury. As a result, according to the Ministry of Finance, from January to May, budget expenditures exceeded revenues by 409 billion rubles.

According to the latest forecast of the Bank of Russia, according to the results of 2020, the country's budget deficit may amount to about 4-6% of GDP. However, the increase in oil prices observed in the last month and the growth in export of raw materials to Asia may reduce the negative difference between the revenues and expenses of the Russian treasury, said Mark Goikhman.

“The increase in Urals sales compared to the spring months and the stabilization of its prices contribute to a significant reduction in the budget deficit in Russia. If under current conditions the cost of the Russian oil is fixed in the range of $ 40-45 per barrel, then the income from raw materials will fully cover the expenses of the treasury for the end of this year, ”the expert concluded.