Saudi crude exports to China have surged, strengthening the Asian country's hand in a price dispute with Iran.
Last month's exports of Saudi crude to China rose by 32 per cent over the same period last year to 4.81 million barrels per day (bpd), almost half of the kingdom's current production, Chinese customs data released yesterday showed.
The increase reflects China's vast appetite for energy and the continuation of Saudi Arabia's high volume of production as Libyan oil is returning to the market.
Ali Al Naimi, the Saudi minister for petroleum and mineral resources, announced that output last month had been just above 10 million bpd, a three-decade high. The kingdom increased production this year as Libya's 1.6 million bpd daily supply to the international markets was interrupted by the civil war that ended Muammar Qaddafi's rule. Libyan production is recovering fast, but Saudi Arabia has kept its pumps busy as high oil prices threaten to push Europe and the US back into recession.
"Saudi ideally does not want a price sustained over a US$100 a barrel," says John Tottie, an energy analyst at HSBC in Riyadh.
China, the world's biggest importer of crude, has been a ready recipient of the kingdom's additional production and is using the extra Saudi supply as leverage to bring down the cost of Iranian oil.
The Islamic republic is under pressure from the US and Europe, which are keen to curtail its oil revenue as the country refuses to abandon its controversial nuclear programme.
China has pounced on the opportunity, intensifying its standoff with Iran by halving its orders for crude to be delivered next month.
Saudi Arabia is said to be averse to bearing the costs of sanctions against Iran by increasing production and to seeing its oil exports used as a weapon in what amounts to economic warfare.
High-ranking officials from the Obama administration visited Saudi Arabia this week to win support for a strategy to reduce exports from Iran, a policy that relies on Saudi Arabia using its spare production capacity. European and US diplomats also met in Rome on Tuesday to discuss a sanctions regime.
"So far, the signal Saudi Arabia is trying to send is that the additional costs created by such an embargo would have to be carried by the buyers," said Samuel Ciszuk, a consultant at KBC Energy Economics.
But Saudi production policy and trade flows are weakening Iran's position with China.
"The Chinese want a better price and want to put pressure on the Iranians by saying 'look, we can actually buy from someone else'," Mr Ciszuk said.
China's import figures are also part of a wider trend among Gulf producers to focus on energy-hungry Asia.
"In future, more and more of the Gulf's crude will be exported to China, and less will end up in Europe," said Robin Mills, a consultant at Manaar Energy Consulting.
Saudi Arabia will not absorb China's demand increase in the long term. The kingdom has shelved plans to increase production capacity to 15 million bpd from its current 12.5 million bpd, and China is looking to Africa to deliver additional supply.
"The trend will be Saudi Arabia not increasing production by much. It will supply a lot to China and Asia, but it will not be the country that meets incremental new demand," Mr Tottie said.