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27 Mar 2025
02 Jul 2018 | 14:30 UTC — Insight Blog
Featuring Analyst Oceana Zhou and Eric Yep
In the world of crude oil trading and energy security, some cardinal rules apply -- never destabilize your most secure source of supply and never upset a trading relationship with the largest supplier in the market.
Chinese trader Unipec broke both rules at one go and the timing was terrible.
It cut its nominations of sour crude from term supplier Saudi Aramco by 40% for barrels loading in May. A month later, Unipec did it again for June and then for July barrels, effectively cutting 40% of its procurement from the world's largest exporter.
This raised eyebrows in several oil trading circles for many reasons.
Long-term oil contracts typically allow buyers to vary purchases by 10%-15% in a given month, to account for seasonal demand fluctuations. A 40% cut is unusual and would only be allowed in special circumstances like a refinery outage.
If an oil refiner does successfully negotiate a large cut, it promises to make up for the purchases in subsequent months to preserve long-term business. The last thing a refiner wants to do is to use rival oil producers as a bargaining chip, which is exactly what Unipec did.
In May, and then in early June, Unipec blamed high Saudi crude OSPs and triggered concerns about Saudi market share in Asia. It told market participants it was confident of replacing Saudi barrels with other suppliers, and estimated the shortfall at merely 4 million barrels, S&P Global Platts had reported.
"Cutting nomination is OK through a private talk with the oil giant, but announcing them is too much," a former Unipec trader said.
The nomination cuts were followed by a series of events, well beyond Unipec's control, but which have created uncertainty over its supply.
On the morning of June 16, China retaliated to the Trump administration's tariffs, with its own tariffs on $50 billion of US products. For the first time, it put crude oil and petroleum products on the list.
This put Unipec's purchase of around 16 million barrels of US crude oil for June loading at risk. This was the biggest monthly volume of US crude ever to be lifted by the company, in line with Sinopec's aim to raise US crude shipments by 80% in 2018.
Ten days later on June 26, the US State Department said it would give no waivers for Iran's oil buyers who will be expected to cut their procurement to zero under sanctions. China is the largest importer of Iranian crude oil.
Then late last week, Unipec ran into problems in Libya where NOC East, rival to the internationally recognized state oil company NOC, has consolidated its control of eastern oil ports and ordered the suspension of crude exports.
At least one vessel loading for Unipec, the Amore Mio II, was not allowed to berth and load crude from the 200,000 b/d Zueitina oil terminal. The empty tanker was stationary off the Zueitina terminal till late last week.
Unipec represents China's largest oil refiner Sinopec and is probably the largest crude purchaser on the spot market, and the world’s largest charterer of VLCCs.
But even for its size, suddenly a lot of options are off the table and its tussle with Saudi Aramco doesn’t seem like such a good move any more.
Unipec was taking around 55% of China's crude oil imports from Saudi Arabia, which was around 606,000 b/d in Q1, according to customs data.
Japanese refiners, traditionally the most risk averse, will tell you that a long-term supply agreement with Saudi Aramco is considered sacrosanct, and it is fairly difficult to secure a new deal with the Saudis in the first place.
"You have to bend and kiss the ring. And even then, you are at the end of the queue. The term customers like national oil companies get the first priority," a veteran oil trader said on condition of anonymity.
"You get the table scraps, if there are any table scraps left. You are the Chihuahua at the end of the table. A Saudi contract is like a blood-brother deal," the trader said.
Market participants also said that business with the Saudis is old school and many deals have been in place for decades.
While Unipec may have been the only player big enough to play hardball with the Saudis in a weak market, they have upset a business relationship that can backfire.
"It is a big challenge for Unipec as everything has come at the same time – the China-US trade tensions, Unipec's trade tensions with Saudi Aramco and the sanctions on Iran," a source close to Unipec said.
"Unipec should be very cautious to deal with Saudi Aramco as it is such a key supplier from the long-term point of view," the former Unipec trader said, adding that the supply shortfall is unlikely to impact physical supply for Sinopec refineries, but it will end up costing them higher for replacement barrels.
Aramco may also want to be prudent in how it manages its relationship with Unipec.
"If the Saudi's retaliate or play hardball, it creates more incentives for the Chinese to move towards Iran," John Driscoll, head of consultancy JTD Energy Services, said by phone.
"The Iranians are poised to seize an opportunity, and China is the most logical choice. The Saudis will not want that," he added.
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