Aramco health adds spice to Saudi yuan dilemma

The Saudi Aramco logo is pictured at an oil facility in Abqaiq, Saudi Arabia October 12, 2019. REUTERS/Maxim Shemetov

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LONDON, March 21 (Reuters Breakingviews) – Saudi Aramco (2222.SE) is giving Mohammed bin Salman some extra firepower in his fight against Joe Biden. The $2.3 trillion Saudi oil giant wants increase its maximum power as crude prices soar. It adds spice to tensions between the Saudi crown prince and the US president that spill over to how the kingdom sets the price of its oil.

Currently, Saudi Arabian crude contracts are denominated in dollars. This makes sense, given that the Saudi riyal is pegged to the dollar and nearly 25% of the Saudi central bank‘s $493 billion in assets are US Treasuries. A sharp revaluation of Saudi Arabia‘s main export products could destabilize the economy and undermine the decades-long friendship between Saudi Arabia and the United States.

However, these links are questioned. The Wall Street Journal recently reported that MbS refused US requests to increase oil supplies amid the Russian crisis. On human rights, Beijing will probably ask fewer uncomfortable questions than Washington. Dollar sanctions on Russia are prompting some countries to rethink the desirability of US hegemony.

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Meanwhile, China buys three times as much oil from Saudi Arabia as the United States. The People’s Republic is Saudi Arabia’s biggest trading partner, buying almost 20% of the kingdom’s goods, up from 5% two decades ago. And Chinese telecommunications company Huawei Technologies and steel producer Baosteel are building telecommunications networks and factories in Saudi Arabia, while Aramco is Planning to build a $10 billion refinery project in China.

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Over the past decade, Saudi Arabia’s trade surplus with China has averaged $24 billion, Capital Economics estimates. If all trade with China were to be conducted in renminbi, the Chinese currency could within five years generate up to 25% of Saudi Arabia’s official foreign exchange reserves. If most of Aramco’s increased production were sold to China, this effect could be exacerbated.

A decisive MbS pivot in China is not guaranteed, however. Even if Saudi Arabia accepts the yuan for 25% of its oil sales, the remaining 75% would still be in dollars. Given the need to protect the peg, this could lead Saudi Arabia to revalue only part of its crude. Still, Aramco’s poor health could encourage MbS to sell another portion of its shares to foreign investors to fund the national economy’s transition away from oil. If China becomes the buyer of these shares, it would say a lot about the price of Saudi oil in yuan.

To follow @karenkkwok on Twitter

(The author is a Reuters Breakingviews columnist. The views expressed are his own.)

BACKGROUND NEWS

– Saudi Aramco on March 20 reported net profit of $110 billion in 2021, up from $49 billion a year earlier. Aramco also said it would increase capital spending to between $40 billion and $50 billion this year, up from $31.9 billion in 2021.

– Aramco announced plans to increase its maximum production capacity from 12 million to 13 million barrels per day by 2027. The company maintained its cash dividend for the full year at $75 billion.

Saudi Arabia has been in talks with China over yuan-priced oil for six years, but accelerated negotiations this year, The Wall Street Journal reported on March 15.

– The reasoning behind the move indicates the kingdom’s frustration with Washington’s attempts to strike a deal with Iran and following the United States’ hasty withdrawal from Afghanistan, the WSJ reported.

– Aramco announced on March 8 that it had signed a memorandum of understanding with China Petroleum & Chemical Corporation (Sinopec) for possible downstream collaboration in China.

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Editing by George Hay and Oliver Taslic. Graphic design by Vincent Flasseur.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and to www.breakingviews.com. All opinions expressed are those of the authors.

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