China and India Establish “Oil Buyers’ Club” to Counter OPEC

On June 11, major Chinese and Indian oil companies started a formal meeting in Beijing, discussing the establishment of an “oil buyers’ club” to negotiate better prices with OPEC countries. The chairman of China’s biggest energy company China National Petroleum Corporation (CNPC), Wang Yilin, and the chairman of refiner Indian Oil Corporation both attended the meeting. According to the India Times, the two largest energy consumers together accounted for almost 17% of world oil consumption last year. Should this “oil buyers’ club” become a reality, New Delhi and Beijing will have greater leverage to negotiate with OPEC about oil prices and will also have a significant say in matters such as importing more crude oil from the US.

Rising oil prices put pressure on big energy importers

OPEC and other oil producing countries, including Russia, have helped oil prices rebound from the last collapse in recent years. This has put pressure on economies of oil importing countries like India and China, which are both experiencing surging energy demand for their domestic economic growth as well as their global development initiatives. However, the cartel members, along their allies, have curtailed their oil supply by 1.8 million barrels per day since the beginning of 2017. They had further agreed to extend these cuts until the end of 2018 with an aim to boost their shrinking economies. In addition, the recent sanctions on Iran by the US government and the financial crisis in Venezuela further exacerbated the decline in the overall OPEC oil output. Thus, in order to compensate for the loss in oil supply from these two countries, Saudi Arabia, a key driver of the production cuts, and Russia, the largest Non-OPEC oil producer, are discussing easing off the production cuts at the next OPEC meeting. This also appears as a response to protect OPEC’s diminishing share in the global oil market due to the rapidly rising US oil supply.

Common front against OPEC dominance in Asian oil market

OPEC has dominated Asian oil market for decades. The cartel sends over 15 million barrels per day into Asia, over sixty percent of its exports, to the leading destinations of China, India, South Korea and Japan. Therefore, Asia will likely feel the biggest impact to any production cut of OPEC countries. As procuring oil at the lowest price becomes increasingly vital for energy-hungry Asian consumers, major oil importing countries in Asia are working on combining their efforts to reduce OPEC’s influence on the oil market. According to an official, possibilities of joint sourcing of oil as well as combined bargaining to reduce the Asian premium price were discussed in the meeting on June 11. “The similar collaboration will be proposed to Japan and Korea as well. With CNPC or its affiliates selling in the overseas market a large portion of oil produced from fields it owns in third countries, India expressed interest in buying the Chinese firm’s equity oil directly,” the official said.

The next move?

India and China’s move arrives in the backdrop of shifting the center of global oil market back to Asia. Potential cooperation among major Asian economies in establishing an “oil buyers’ club” will bring significant challenge to OPEC, giving rise to its competition with North America in exporting oil into the Asian market. India and China are likely to boost imports of US crude from Mexico Bay and Texas shale oil fields, a move aimed at putting pressure on OPEC members to keep oil prices under control.

China and India, the largest and second-largest importers of Iranian crude, will also have greater control over the Iran nuclear deal if they succeed in forming an “oil buyers’ club”. Regarding the recent tensions between Beijing and Washington D.C. on trade issues, China is not likely to support US action against Iran if it has the leverage to negotiate a lower oil price with the country. With its huge infrastructure development projects in Iran, such as the $3-4 billion development plan for the Farzad B gas field, India is also unlikely to abide by US sanctions against Iran in order to avoid friction and obtain a better oil deal.

This article was first published on Global Risk Insights, and was written by Yueyi Chen.

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