Bank of China opens branch in Saudi Arabia

China’s most internationalized state bank on Tuesday opened its first branch in Saudi Arabia in a move to expand the use of yuan amid a growing number of economic deals between the two countries.

Bank of China (BOC), one of China’s four biggest state-owned banks, opened its branch in Riyadh, the capital city of the oil-rich Middle Eastern country, more than two years after being given approval by the Saudi Arabian government.

The branch has more than 20 staff, with a majority hired locally – a condition requested by local authorities.

It is the second Chinese bank to open a branch in Saudi Arabia after the Industrial and Commercial Bank of China (ICBC) opened its first branch in Riyadh in 2015. ICBC also opened a branch in Jeddah in May.

China’s ambassador to Saudi Arabia, Chen Weiqing, said the opening of the branch was a result of positive developments in the bilateral relations between the two countries, and new stage of financial cooperation.

“It also shows that China highly recognizes the financial regulations, investment environment, and geographical advantages of Saudi Arabia,” Chen said, as he attended the opening ceremony with Bank of China president Liu Jin.

Saudi Central Bank governor Ayman al-Sayari and Saudi Arabia’s deputy investment minister, Saleh Ali Khabti, also attended the opening ceremony along with 250 guests.

The Saudi-listed ACWA Power, Saudi Arabia’s Ministry of Investment, Ajlan & Bros Holding Group and Zhejiang Rongsheng Holding Group signed memorandums of understanding involving internationalizing the yuan and green financing with BOC during the opening ceremony, the statement added.

The move came as part of a growing series of economic activities between China and Saudi Arabia, with their bilateral relations described as being at the best stage ever following President Xi Jinping’s state visit in December 2022, with both countries facing souring relations with the West.

During the trip at the end of last year, Xi pledged to work towards widening the use of yuan in oil and gas trade in the region, amid a push to establish the currency internationally and weaken the US dollar’s grip on world trade.

Saudi Arabia is China’s largest source of crude oil imports, with 87.5 million metric tons (641 million barrels) shipped in 2022.

Amid efforts by state banks to tap potential in the Middle East, BOC’s new branch has been licensed to provide basic commercial banking services to individual consumers and small- to medium-sized businesses, ranging from deposit accounts and loans to mortgages and yuan transactions.

At the weekend, BOC president Liu also met Khaled Mohamed Salem Balama Al Tameemi, the governor of the central bank of the United Arab Emirates, to court more support for its yuan clearing in the region and potential cooperation with the nation’s sovereign wealth funds.

In an interview with local media in June, BOC said the new branch aimed to offer the yuan to the wider Middle East region to assist commercial and financial trade between China, Saudi Arabia and beyond.

As there are many Chinese companies entering the market in the region, being able to trade and make financial transactions using the yuan would encourage Chinese companies to invest in the area.

The Saudi Arabian government first agreed to allow BOC to open its branch in January 2020. At the time, Saudi Arabia had only 14 foreign banks, including ICBC.

BOC also has existing branches in Abu Dhabi and Dubai in the UAE, as well as Bahrain, Turkey and Qatar.

Li Tong, president of the bank’s investment banking unit, Bank of China International, said in June during the Arab-China Business Conference in Riyadh that the new branch in Riyadh would push for financial cooperation, and further boost economic cooperation between the two countries.

The bank has also been in discussion with local counterparts to offer panda bonds – yuan-denominated bonds sold by overseas entities in China’s onshore bond market to raise investments in China.

A number of other banking sector collaborations have also been announced this year.

In March, the Export-Import Bank of China announced a first loan cooperation with Saudi National Bank, Saudi Arabia’s largest bank, in yuan.

Hong Kong has also been named as a major hub for financial cooperation between China and Saudi Arabia.

In July, the Hong Kong Monetary Authority, the city’s de facto central bank, signed a memorandum of understanding with the Saudi Central Bank, pledging initiatives in financial infrastructure development, open market operations, market connectivity and sustainable development.

 

 

Crude oil prices take a dip despite supply cut by Saudi Arabia and Russia

Oil prices reversed course on Wednesday after rising over 1one percent in the previous session, on a firmer dollar and as investors shrugged off jitters arising from supply cuts from Saudi Arabia and Russia.

"The reason the market gave back half of the gains and is listless this morning, is because within the language of the joint announcement there is a caveat that these cuts will be reviewed on a monthly basis," said John Evans of oil broker PVM.

"This flexibility add-in allows for wiggle room, but the market smells a taper," he said, citing conditions like anti-inflation battles in the United States and other countries, whether crude prices near US$100 a barrel, or the effect on Saudi oil revenues.

Saudi Arabia and Russia on Tuesday extended their voluntary oil cuts to the end of the year 2023. While Saudi Arabia relinquished one million barrels per day (bpd), Russia agreed to cut 300,000 bpd. These are on top of the April cut agreed by several OPEC Plus members till end 2024.

Both countries will review their decisions monthly to consider deepening cuts or raising output depending on market conditions.

The rising oil prices could be restrained when crude demand dips as US refineries enter their September-October maintenance period, said Sugandha Sachdeva of Acme Investment Advisors.

Iranian crude supply rises could also hobble price gains. "Iran is producing close to 3.1 million bpd and plans to pump around 3.4 million bpd," ING Economics analysts noted.

 

Iran oil exports touch new high in August 2023

Iranian oil exports continued upward trend in August and reached 1.85 million barrels per day (bpd), Bloomberg reported, citing TankerTrackers.com which provides data on oil cargoes to governments, insurers and other institutions.

The increase in Iranian shipments comes in the same month that key OPEC Plus producers Saudi Arabia and Russia kept a lid on their own oil exports in a bid to tighten the market.

According to the TankerTrackers data, Iranian crude exports topped two million barrels a day in the first 20 days of August, the highest this year.

Iran has been steadily ramping up its oil production and exports this year, finding buyers for its supplies in Asia. The country’s production is now at the highest level since a ban on its exports kicked in five years ago, with US officials privately acknowledging they’ve gradually relaxed enforcement on some of the measures.

Earlier this month, SVB International, an energy consultant, estimated Iran’s oil production in August to be 3.15 million bpd, the highest since 2018.

“Iran is on the path to recover its pre-sanctions oil production,” said SVB’s Sara Vakhshouri, Business Recorder reported.

Analysts believe the higher exports of Iranian crude oil appear to be the result of the Islamic Republic’s success in evading US sanctions.

Back in August, Bloomberg reported that China’s oil imports from Iran were soaring in August so that the shipments were expected to reach 1.5 million bpd, the highest since 2013.

Citing estimates from data intelligence firm Kpler, Bloomberg put China’s imports of Iranian oil during the January-July 2023 period at 917,000 bpd on average.

In late July, Kpler said that Iran’s oil shipments to China have more than tripled over the past three years despite the U.S. sanctions on the country and the increase in Russia’s shipments to the Asian country.

According to the data analyzing firm, Iranian crude exports to its major trade partner have been hovering around one million bpd in 2023, while the figure was roughly 325,000 bpd in 2020.

Also, the International Energy Agency (IEA) in a recent report titled "Oil 2023" confirmed Iran's daily export of one million barrels of oil to China, saying, “Despite severe financial restrictions, Iran managed to increase its crude oil production by about 140,000 barrels per day in 2022 to an average of 2.5 million barrels per day. It seems that Tehran has maintained its crude sales to China, which has been around one million barrels per day since the third quarter of last year.”

Earlier in April, Bloomberg reported that “Chinese private refineries are buying more Iranian oil despite the rising competition for supplies from Russia.”

“So-called teapots are prioritizing the flows, with Russian supplies getting pricier as mainstream buyers such as state-owned Chinese refiners and Indian processors take a greater share,” the report read.

In March, China’s imports of Iranian crude and condensate jumped 20% month-on-month to 800,000 barrels a day, and are on track to extend gains in coming months, Emma Li, an analyst with data intelligence firm Vortexa Ltd told Bloomberg that month.

While Iranian oil has long been sanctioned by the U.S., refiners in China have proved to be a consistent outlet.

Most Iranian oil used to go to state-owned refineries but “the private refiners in Shandong especially are now running the show,” said Homayoun Falakshahi, senior crude oil analyst at Kpler.

 

Saudi Arabia, Russia extend production cuts

According to Reuters, Oil prices surged about 2% on Tuesday to their highest since November last year, after Saudi Arabia and Russia extended their voluntary supply cuts to the end of the year 2023, worrying investors about potential shortages during peak winter demand.

Brent crude futures rose by US$1.32, or about 1.5%, to US$90.32 a barrel by 1739 GMT. The global benchmark, used to price over three-quarters of the world's traded oil, rose to US$91.15 per barrel earlier in the session, its highest since November 17, 2022.

US West Texas Intermediate crude (WTI) futures rose US$1.49, or about 1.7%, to US$87.04 a barrel, after also hitting a 10-month high of US$88.07 earlier in the session.

Investors had expected Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.

"Certainly the market was caught off-guard by the aggressiveness of their stance," said John Kilduff, partner at Again Capital LLC in New York.

Both Saudi Arabia and Russia said they would review the supply cuts monthly, and could modify them depending on market conditions.

"With the production cut extended, we anticipate a market deficit of more than 1.5 million barrels per day in 4Q23," UBS analyst Giovanni Staunovo wrote in a note to clients. UBS now expects Brent crude to rise to US$95 a barrel by end 2023.

Reflecting concerns about the short-term market supply, front month Brent and WTI contracts were also trading at their steepest premium since November 2022 to later-dated prices. This structure, called backwardation, indicates tightening supply for prompt deliveries.

Also supporting oil prices on Tuesday, Goldman Sachs said it now sees the probability of a US recession starting in the next 12 months at 15%, down from an earlier forecast of 20%.

Along with the Saudi supply cuts, which began in July, prospects of the US economy avoiding a hard recession have helped lift oil demand and prices in recent months.

Both Brent and WTI futures have gained more than 20% since the end of June this year.

 

 

Israel, Cyprus and Greece mull energy pacts

The leaders of Israel, Greece and Cyprus on Monday pledged to deepen energy cooperation and explore ways to get East Mediterranean gas to Europe, as well as connect electricity grids.

The eastern Mediterranean has yielded major gas discoveries in the past decade, mostly off Israel and Egypt, with interest rising since Russia's invasion of Ukraine hit flows to Europe.

"We will have to decide soon about how Israel exports its gas and the same decisions have to be made by Cyprus. We are looking at the possibility of cooperating on this," Israeli Prime Minister Benjamin Netanyahu told reporters in Nicosia after a tripartite summit with Greek Prime Minister Kyriakos Mitsotakis and Cyprus' President Nikos Christodoulides.

"Those decisions will be made, I think, in the next three to six months, probably closer to three months," he said.

Earlier this year, Cyprus suggested expediting gas to market by the creation of a short pipeline linking Israel's east Mediterranean gas fields to a liquefaction facility on Cyprus, which could then be shipped to Europe.

"We agree that natural gas and renewable energy is a prime pillar of cooperation in the region, especially in light of the recent geopolitical developments," Christodoulides said. "Especially in Europe, (it) dictates the need for energy diversification and increased interconnectivity," he said.

Netanyahu said Israel was also "eagerly pursuing" being part of a planned subsea electricity link. The European Union-supported EuroAsia Interconnector subsea cable is envisaged to carry up to 2,000 megawatts of electricity to eventually link grids from Israel and Cyprus to Greece.

"We would like to have it connected obviously to Israel, and possibly to the east of Israel," Netanyahu said.

The three countries have built strong bonds over the years, and Netanyahu said one direct example of economic bonding was through food.

"We like your food," he interjected off script as Mitsotakis finished speaking. "We like your dairy products. We like your yoghurt."

Netanyahu said authorities would soon open the country's dairy product market, which now protects local production with high import duties.

"We intend to open the dairy market very soon to Greek and Cypriot—and other—imports. May the best yoghurt win. You have a pretty good chance at winning."

 

Chinese President to skip G-20 meeting

Who shows up where can be very revealing 

According to Bloomberg, for the first time since he took power, Chinese President Xi Jinping will skip a Group of 20 summit. Instead, China is sending Premier Li Qiang to the event hosted by India’s Prime Minister Narendra Modi. That’s a clear signal of the relative value he places on the G-20 — set up with US backing in the late 1990s — versus the newly expanding BRICS grouping. 

Xi just made one of his rare 2023 overseas visits last month, to attend the BRICS summit in South Africa, where he successfully pressed for its expansion to include commodity powerhouses including Saudi Arabia, Argentina and the United Arab Emirates.

The new BRICS-11 will account for a major share of key global inputs, according to calculations by Center for Strategic and International Studies researchers Gracelin Baskaran and Ben Cahill: a) 42% of the world’s oil supply, b072% percent of rare earth minerals- with three of the five nations with the largest reserves, c) 75% of the world’s manganese, d) 50% of global graphite and e) 28% of nickel

“It is quite possible that a more coordinated approach” toward export restrictions to the rest of the world could now develop among the BRICS-11, the CSIS analysts wrote.

In the energy field, the group features both major oil and gas producers as well as two of the largest importers, in China and India.

Therefore, there is an incentive for members to set up mechanisms to trade commodities outside the reach of the G-7 financial sector, Baskaran and Cahill wrote.

Ex-Treasury Secretary Lawrence Summers — who was in government when the G-20 began — says the enlarged BRICS is a symptom of the US abdicating global leadership in the cause of economic nationalism. Whereas Washington once championed free-trade deals, now its focus is on import restrictions and a buy American bias, he says.

Whenever anybody says they care about producers, not low prices for consumers, they are adopting a negative sum, ‘all-against-all’ vision of international economic policy that invites challenges to the post-WWII vision the US once championed, says Summers, a paid contributor to Bloomberg Television.

The BRICS-11 has its own challenges. Bloomberg’s geo-economics team, led by Jennifer Welch, cautions that the dollar is unlikely to be dethroned by any push by the group to use alternatives.

India-China border tensions, part of the backdrop to Xi’s skipping the G-20, are a bar to BRICS-11 coordination. President Joe Biden, who will be showing up in New Delhi this week, has every incentive to keep Modi aloof from China. Treasury Secretary Janet Yellen’s attendance marks her fourth visit to India in 10 months, highlighting the US focus on that relationship.

Biden and Xi will both be no-shows at the Asean summit of Southeast Asian nations and key trading partners in Jakarta, Indonesia, this week, a missed chance for both.

Japan’s Prime Minister Fumio Kishida will be — a great opportunity for this key US ally to show support for the region in the wake of a provocative Chinese map that sowed acrimony there.

And to share a stage with regional counterparts as China tries to isolate Japan over its discharge of treated wastewater from wrecked Fukushima reactors into the Pacific.

 

Palm oil glut to impact producing countries

According to Nikkei Asia, weak prices for palm oil are pushing Indonesia and Malaysia - two of the world's biggest producers to boost domestic use through developing jet fuels and expanding biodiesel programs.

Widely used in Indonesia for cooking oil and applications such as personal care and cleaning products, palm oil is an important sector in Southeast Asia's largest economy with the industry employing millions of workers. Indonesia is the world's largest exporter and it is the country's top export commodity, apart from coal. Palm oil is similarly important in neighboring Malaysia, the world's second-largest producer and exporter.

The benchmark crude palm oil (CPO) price in Malaysia ranged from 3,500 ringgit (US$755) to 4,200 ringgit per ton between January and June. That is compared to the all-time high in April 2022 of almost 7,000 ringgit per ton, following the launch of Russia's invasion of Ukraine, which sent prices of all edible oils skyrocketing. That run-up in prices for palm oil, traditionally the cheapest among vegetable oils, was a continuation of one caused by pandemic-related disruptions since late 2020.

"Elevated inventories in India and mainland China, an expected increase in global soybean production through the 2023-24 season, and the upcoming September-October period of peak palm fruit yields - all point to downward pressure on prices through the remainder of 2023, BMI, a research unit of Fitch Group, said in an August 15, 2023 note.

"Through the medium term, it remains our view that average annual palm oil prices will continue to ease."

BMI forecast an average price of 3,800 ringgit per ton for Bursa Malaysia-listed third-month palm oil futures contracts in 2023, down from the average of 4,910 per ton last year. It also forecast prices will continue to fall, reaching 2,400 ringgit a ton in 2027 -- on par with a five-year pre-COVID pandemic average of close to 2,420 ringgit per ton.

The declines have hurt incomes of major palm oil producers after many enjoyed record profits in 2021 and 2022.

In Malaysia, state-owned conglomerate Sime Darby Plantation reported that second-quarter net profit fell by 54% to 380 million ringgit from the same period in 2022. FGV Holdings, also government linked, saw its plantation sector plunge 97% to 13.76 million ringgit, mainly due to the lower average CPO price compared to the previous year and on top of lower CPO sales and 37% higher CPO production costs.

In Indonesia, net income at top producers Sinar Mas Agro Resources and Technology, Astra Agro Lestari and Salim Ivomas Pratama declined 85%, 54% and 71%, respectively, in the first half of 2023, to 284.3 billion rupiah ($18.7 million), 367.6 billion rupiah and 128.4 billion rupiah.

Political issues also weigh on producers. A European Union regulation on deforestation-free supply chains entered force on June 29, 2023. S&P Global said in August that combined with the EU's renewable energy directive, which limits the use of palm oil for biofuel in EU markets starting in 2030, the new law is "seen as another layer of restrictions by palm oil producing countries."

Indonesia and Malaysia account for about 85% of global palm oil trade while the EU is typically the third largest importer after China and India. Indonesia, Malaysia and the EU have reportedly agreed to form an ad hoc task force to hash out issues related to the implementation of the deforestation regulation.

To deal with the market and political pressures, Jakarta and Kuala Lumpur are seeking new ways to utilize the commodity.

State-owned airline Garuda Indonesia in August announced the start of a static test on a "sustainable aviation fuel," or "bioavtur," on an engine used in its Boeing B737-800 NG fleet, with ground and flight tests to follow. Garuda's bio jet fuel is jointly developed by Indonesian state oil company Pertamina and the Bandung Institute of Technology.

Also last month, Indonesia expanded its mandatory B35 biodiesel program -- produced by Pertamina -- nationwide, after a partial introduction in February. B35 has a higher palm oil content in the diesel mix than the B30 launched in early 2020. Indonesia is next targeting B40 for 2030.

Indonesia is pushing the biodiesel program expansion as palm oil prices have fallen from the record highs. Malaysia is also exploring its own biofuel efforts.

The Malaysian Palm Oil Board and state energy giant Petronas signed an agreement in August to study using cooking oil and palm oil waste as sustainable aviation fuel. In the second phase of the National Energy Transition Roadmap launched late last month, the government included a B30 biodiesel mandate on heavy vehicles by 2030 after rollout by 2025.

Yusuf Rendy Manilet, economist at Indonesian think tank Center of Reform on Economics, sees Indonesia's biofuel policy as ultimately viable. 

"The government's goal is to reduce dependency on imports of oil by leveraging biofuels in order to improve the trade balance," Manilet told Nikkei Asia. "In the long run, with more biofuels becoming available and oil imports reduced ... fuels will become more affordable and lead to improving purchasing power."

BMI said increasing biofuels uptake could pose a "major upside risk" to its price outlook for edible oils overall. "An increase in the rate of diversion of palm oil to the manufacture of blended biofuels -- or, the greater diversion of alternative edible oils, such as soy oil, to biofuels - would tighten the supplies of edible oils for food consumption."

It added that the developing El Nino weather phenomenon, marked by drier and hotter weather in Southeast Asia, poses another major upside risk to its palm oil price outlook over the next 12 to 18 months -- although "much depends on the eventual strength of the El Nino event itself."

BMI said the 2014-16 El Nino, one of the most severe of modern times, led to double-digit annual declines in percentage terms for crop yields in both Malaysia and Indonesia over the 2015-16 season -which resulted in palm oil prices rising by 1,000 ringgit per ton during the period.