Sat. Jan 22nd, 2022

Aramco, the world’s largest oil company, will buy 30 per cent of a refinery on the Baltic coast, as well as a wholesale fuel unit.

By Bloomberg

Saudi Aramco’s agreement to supply almost half of Poland’s oil will give the world’s largest crude exporter a stronger foothold in a region that has long dominated Russian producers.

Aramco, the world’s largest oil company, will buy 30% of a refinery on the Baltic coast, as well as a wholesale fuel unit. It has also signed a long-term delivery agreement with Polish refiner PKN Orlen SA.

The oil giant owned by the Saudi government will increase oil sales in Russia’s energy backyard just as the two nations, which are joint leaders of the OPEC + producers’ alliance, are working on nearly two years of production cuts they have implemented with the onset of the pandemic.

The deal could have implications outside Poland, as Orlen could use the crude oil in refineries in Lithuania and the Czech Republic. Many Eastern European plants are designed to operate on Russia’s Ural grade and some may require technical adaptation to use different barrels. Crude oil from Saudi Arabia and Iraq regularly competes with Russian barrels for customers.

Aramco’s acquisition will “expand the company’s presence in Europe’s refining system with an interest in a recently upgraded refinery,” Salih Yilmaz and Rob Barnett, analysts at Bloomberg Intelligence, wrote in a research note. It will also help Aramco strengthen its position in a region traditionally dominated by Russian crude oil.

Nice competition

The 23-member OPEC + alliance has curtailed production since 2020 to support oil markets after the pandemic forced governments to shut down economies, limiting demand. Now, with economies recovering and oil trading above $ 80 a barrel, the group is gradually rolling back those cuts and bringing more oil back to market.

Competition for customers remains fierce among the world’s top producers, even as they work together to control supply. Russia exports oil by pipeline to Asia, where it competes with Saudi barrels in Aramco’s largest market.

European sales make up a small part of the daily flotilla of crude oil leaving Saudi Arabia to world markets. Shipments to China alone make up about a quarter of the kingdom’s nearly 7 million barrels of daily crude oil sales, according to data compiled by Bloomberg.

In comparison, the Saudis will sell no more than 337,000 barrels of crude oil a day to Poland, according to a statement from Orlen. This is higher than previous contracts that provided for the purchase of about 100,000 barrels of Saudi oil by Orlen daily. The new agreement will cover almost half of the country’s raw needs, according to Daniel Obajtek, CEO of Orlen.

OPEC + Output

The Organization of Petroleum Exporting Countries, of which Saudi Arabia is the largest producer, has said it will continue to work with the alliance’s other Russia-led petroleum states, even after the current round of austerity measures has ended. The group also said it might not roll back all of the output cuts this year if demand worsens.

With Saudi production rising more than 10 million barrels a day last month, the first time since April 2020, competition for buyers everywhere is likely to increase. While OPEC + members will increase output next month in line with the group’s plans, Russia’s output will be limited due to a lack of savings capacity and any future growth will mostly be supported by additional drilling.

The last time Saudi production was as high as it is now, Saudi Arabia and Russia were caught up in a brief price war, when both countries increased production after previous OPEC + cooperation fell apart.

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