Markets

China wants the Petroyuan to weaken the dollar as oil producers gather in Beijing

  • Russia’s war against Ukraine has caused a greater acceptance of the yuan for oil sales, which could change the crude oil market.
  • Kpler lead crude oil analyst Victor Katona told Insider that Russia has essentially “become an Asian nation.”
  • The birth of the so-called petroyuan could spread across Asia for crude oil transactions, he added.

While the dollar is likely to remain the dominant global currency for the foreseeable future, the so-called petroyuan’s rise will gain momentum as China capitalizes on its status as the world’s largest oil importer, analysts say.

The dollar remains the main currency for trade and foreign exchange reserves. But Beijing is increasingly pushing the yuan as the currency for oil deals, challenging the dollar’s leading position in commodity markets.

In particular, Russia’s invasion of Ukraine last year was the biggest driver of the shift away from the dollar, said Victor Katona, lead crude oil analyst at Kpler.

While Western countries have frozen Russia’s foreign exchange reserves and shunned its oil, Moscow has embraced Asia as an alternative crude market and overtook Saudi Arabia last year as China’s biggest oil supplier.

In fact, Russia actually became “the Asian nation that, in my opinion, brought the yuan into the big oil trade,” Katona told Insider.

And while defenders of the dollar point to its widespread confidence and liquidity, he said it was “naive to think that China would not seek to control the price of oil, that it would not want to trade in a currency that it controls.” “

That’s especially the case after the Federal Reserve’s aggressive tightening campaign sent the dollar soaring last year, he added. Since oil contracts are mostly priced in dollars, a rising dollar makes oil contracts more expensive.

And as yuan-based trade with Russia grows, China is also targeting the Middle East to reshape energy markets.

During a visit to Saudi Arabia last month, Chinese President Xi Jinping urged countries in the Gulf Cooperation Council (GCC) to use the Shanghai Oil and National Gas Exchange to strike yuan-based energy deals. China and Saudi Arabia also signed trade deals worth over $30 billion during the visit.

That trip marked the “birth of the petroyuan,” according to a recent note from Credit Suisse analyst Zoltan Pozar, who said China was looking to de-dollarize parts of the world after the currency’s dominant status was used against Russia.

Pozsar also pointed out that Russia, Iran and Venezuela account for 40 percent of OPEC+’s proven oil reserves, while the GCC accounts for another 40 percent.

Eventually, the petroyuan will rise regionally as well, forcing many Asian countries to “reexamine their trading routines,” Kplerov Katona said.

One of China’s central tenets of its commodity policy, he added, is strict oversight of even the most mundane details of crude oil and currency trade that could help strengthen the country’s control over energy markets.

“That [China] strictly controls state-owned oil companies, sets guidelines for how much they can export. “He limits the price of coal when necessary, centralizes the purchase of iron ore when he feels his companies are being treated differently,” Katona said.

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