Russian ESPO crude loading has been offered to China for payments in yuan, as the world’s top crude importer continues to purchase Russian oil but is constrained in bank guarantees by the Western sanctions on the Russian banking system.
According to Bloomberg’s trading sources, the Geneva-based seller of oil, Paramount Energy & Commodities SA, has recently allowed some customers in China to pay in yuan.
One of the core staples of the past 40 years, and an anchor propping up the dollar’s reserve status, was a global financial system based on the petrodollar. All of this would support the standing of the USA as the world’s undisputed financial superpower
Oil producers would sell their product to the USA (and the world) for dollars, which they would then recycle the proceeds of in dollar-denominated assets and, while investing in dollar-denominated markets, to explicitly prop up the USD as the world reserve currency.
The Saudis are angry over the USA’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program and were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports, and if priced in yuan, those sales would boost the standing of China’s currency, and set the Chinese currency on a path to becoming a global Petro-yuan reserve currency.
A shift to a (petro)yuan system, would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars as the majority of global oil sales—around 80%—are done in dollars.
The Saudis have traded oil exclusively in dollars since 1974, in a deal with the administration that included security guarantees for the kingdom. It appears that the Saudis no longer care much about US security guarantees and instead are switching their allegiance to China.
As a reminder, back in March 2018, China introduced yuan-priced oil contracts as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market, largely because the USD remained the currency of choice for oil exporters.
But, for China the use of dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to Ukraine. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.
China has been stepping up its courtship of the Saudi kingdom in recent years, helping Saudi Arabia build its own ballistic missiles, consulting on a nuclear program, and investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city.
China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day.
The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the Arab kingdom.
Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it.
Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to re-peg the riyal to a basket of currencies, similar to Kuwait’s dinar.
If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China.
Still, the Saudis plan to do most oil transactions in dollars, but the transition has begun, and the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola, and Iraq.
The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency. If that block is taken out of the wall, the wall will begin to collapse.
The idea of a new global reserve currency was reintroduced last week by none other than former NY Fed staffed Zoltan Pozsar who wrote in his latest must-read note that when this crisis is over, the U.S. dollar should be much weaker and, on the flip-side, the Renminbi much stronger, backed by a basket of commodities.
From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities).
And so the pieces of the endgame are falling into place. Russia is now starving the western world of much-needed resources thanks to evil US sanctions, sending commodity prices ever higher.
At the same time its silent partner China quietly picks up the monetary pieces and takes advantage of the Western scramble to secure resources at all costs.
China could now approach all those other non-western former petrodollar clients – who are also rich in other resources, and offer them a new product, the yuan, which Beijing is now actively and aggressively pushing to dethrone the dollar as a global reserve currency.
Oil Price.com / ABC Flash Point News 2022.