Chat with us, powered by LiveChat

China's Petroyuan Rally Gains Momentum Among Oil Producers

Derek Wolfe

Updated: January 11, 2023

Yuan currency
Editor’s Note:

EDITOR'S NOTE: China aims to weaken the US dollar by shifting the oil trade away from the greenback and toward the yuan, aka “petroyuan,” where energy trades will find their new home in Beijing. Russia, the enemy of the West, has long been part of this economic alliance. Still, the dollar may retain its longstanding status as the world’s most dominant currency, but it may no longer enjoy its “unipolar” reign, as Putin calls it. A good portion of the world is likely to trade oil in yuan, a trend that will accelerate global de-dollarization and weaken the dollar’s hegemony over global commodity markets. In short, your dollar may be worth less than in decades past. And hopefully, you’re holding other forms of “sound money” to compensate for its gradual decline.

  • Russia's war on Ukraine triggered a larger embrace of the yuan for oil sales which could shift the crude market. 
  • Kpler lead crude analyst Viktor Katona told Insider that Russia has essentially "become an Asian nation."
  • The birth of a so-called petroyuan could spread across Asia for crude transactions, he added. 

While the dollar will likely remain the dominant global currency in the near future, the rise of a so-called petroyuan will gain momentum as China leverages its status as the world's biggest oil importer, analysts say.

The greenback remains the top currency for trade and foreign reserves. But Beijing is increasingly pushing the yuan as a currency for oil deals, challenging the dollar's lead in commodity markets.

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

As Western countries froze Russia's currency reserves and shunned its oil, Moscow embraced Asia as an alternative crude market and surpassed Saudi Arabia last year as China's top oil supplier.

In fact, Russia has effectively become "an Asian nation that in my opinion has introduced the yuan into large-scale oil trade," Katona told Insider.

And although defenders of the dollar point to its widespread trust and liquidity, he said "it is naive to think that China will not be seeking to control the price of oil, that it would not want to conduct trade in the currency that it controls."

That's especially the case after the Federal Reserve's aggressive monetary tightening campaign sent the dollar soaring last year, he added. Because oil deals are largely priced in dollars, a rising greenback makes oil contracts more expensive.  

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

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

That trip marked "the birth of the petroyuan," according to a recent note from Credit Suisse analyst Zoltan Pozsar, who said China wants to dedollarize 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% of OPEC+'s proven oil reserves, with the GCC making up another 40%.

Eventually, the petroyuan will pick up steam regionally as well, forcing many Asian countries to "reconsider their trading routines," Kpler's Katona said.

One of China's central tenets of its commodity policy, he added, is strict oversight over even the most mundane details of crude and currency trade that could aid in strengthening the country's grip over energy markets. 

"It [China] tightly controls state-owned oil companies, sets directions for how much they can export. It caps the price of coal when necessary, centralizes the purchasing of iron ore when it senses that its companies are being treated differently," Katona said. 

 

Originally published by Brian Evans at Business Insider

No Investment Advice

GSI Exchange is a publisher and precious metals retailer. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person. You understand that the Content on the Site is provided for information purposes only, and none of the information contained on the Site constitutes an offer, solicitation or recommendation to buy or sell a security. You understand that the GSI Exchange receives neither monetary or securities compensation for our services. GSI stands to benefit from the sell of retail cost precious metals on this site. To avoid hidden costs all prices are listed live 24/7 on this site. Read the full disclaimer

GSI Exchange Infokit - evergreen

GET YOUR FREE

GOLD SILVER INFO KIT

Precious Metals and Currency Data Powered by nFusion Solutions