Oil bears are gaining the upper hand in the tug of war with bulls. Optimism stemming from easing worldwide lockdowns proved illusory last week as recovery hopes were jolted by renewed virus jitters. Confirmed worldwide infections topped 10 million and the death toll passed 500,000. These grim milestones came amid a rapid resurgence in COVID-19 cases in several major countries. The US recorded its biggest one-day increase since the onset of the pandemic with infections on the rise in 29 of 50 states. Elsewhere, Europe witnessed its first weekly increase in months. Meanwhile, India passed half a million infections and China reinstated a strict lockdown near Beijing. In short, fears of a dreaded second coronavirus wave are on the brink of turning into reality.

And if that wasn’t enough to fret about, investors were unnerved by yet more doom-mongering by the IMF. The Washington-based lender took an axe to its already bleak global growth forecasts. A previous estimate of a 3% fall in global GDP this year was slashed to an even deeper 4.9%. Moreover, it warned that the global cost of the COVID-19 crisis could reach a mind-boggling $12 trillion. These grim predictions injected heaps of bearish impetus into the risk-asset complex. Leading US stock indices were left nursing a weekly decline of around 3% after a sharp drop on Friday.

Oil slipped back in tandem with Wall Street as virus-induced demand concerns were thrust back into the spotlight. Brent and WTI also lost roughly 3% during the week despite initially touching the highest level since early March. RBOB was the worst of the bunch with a 10% weekly drop. Worsening COVID-19 outbreaks in the US has dampened the outlook for US gasoline demand.

Looking ahead, anxiety is likely to remain heightened as the epic fight against the coronavirus pandemic continues. This spells bad news for risk assets which will inevitably remain under pressure. Last week’s pullback suggests markets got ahead of themselves. Sentiment has been running on hope rather than reality. Yet it is now clear that relying solely on hope is a dangerous game to play.

Binging on Saudi crude

Saudi Arabia has led by example in curbing supply as the latest OPEC+ supply cut pact got underway. Oil production from the OPEC kingpin declined by more than 3 mbpd in May from the previous month, according to OPEC-surveyed secondary sources. Yet these historic production cuts failed to undermine its market share ambitions. Quite the opposite, in fact. The Saudis are making more headway in expanding their presence in the world’s top oil importing market.

China’s intake of foreign crude in May jumped to the highest monthly level on record. This coincided with the Saudis regaining their crown as China’s top crude supplier after Russia had the upper hand in April. This marks the latest chapter in the long-running tussle between the two oil superpowers for dominance in China’s oil market. But what makes this latest change in the leader board noteworthy is that Saudi Arabia leapfrogged the non-OPEC producer in record fashion. China’s intake of Saudi crude rose 71% from April to an all-time high of 2.16 mbpd. In contrast, Russian shipments to China were largely flat on the month at 1.82 mpbd.

A big reason why Chinese refiners favoured Saudi crude last month was due to steep discounts. But it is also part of Riyadh’s strategy of targeting China’s independent refineries which have spearheaded record crude oil imports of late. This rapprochement is even more pertinent now given that China is the only beacon of oil demand growth amid the virus-hit landscape. The Saudis will therefore be rightfully full of glee after reclaiming top spot in China’s energy market. However, getting to the top is only half the battle. Saudi supremacy in the epicentre of global oil demand growth will not go unchallenged.

First and foremost, Russian oil shipments to China are expected to have risen sharply this month. Chinese refiners have purchased a quarter of Russia’s Urals oil exports planned for June from the Baltic ports. This in in spite of record high premiums. The upshot is that Urals oil supplies to China are poised to reach a record 2.2 million tonnes this month, according to Refinitiv Eikon data. That said, Russian oil exports are set to fall across the board in the coming months as domestic fuel consumption rises. Shipments for 3Q20 have been set 3.8% lower than 2Q, according to Reuters calculations.

All the while, Saudi Arabia’s leading position in China is at risk from the arrival of a rejuvenated challenger. Beijing has in the past purchased US crude in fits and starts. Now, though, China is set to receive a record amount go crude oil in July, around 1 mbpd according to Refinitiv, more than double the previous of 466,000 bpd in June 2018. This massive increase in US crude imports is part of January’s “Phase 1” trade deal between Washington and Beijing. Its impossible to envisage this incursion of US crude not partly stemming the flow of Saudi crude to China. At the same time, Saudi deliveries to Asia may also be pressured next month by the usual seasonal increase in Saudi Arabia’s domestic consumption for power generation.

For now, the onus is on Russia and the US to undermine Saudi Arabia’s dominance in the energy-hungry country. In the meantime, Saudi Arabia will continue its strategy of targeting China’s independent refineries as part of its pivot to Asia. One thing that is clear is that the battle for capturing China’s prized market is set for more twists and turns. If anything, it provides a timely reminder that even in a world of producer alliances, oil exporters are still fundamentally fierce competitors.