Are China and Saudi Arabia About to Settle Oil in Yuan?

China announced on Friday, in very low-key terms, that it will launch direct trading of its currency, the yuan, with the riyal of Saudi Arabia and also with the dirham of the United Arab Emirates. This now brings the total number of foreign currencies that are permitted to trade direct with the yuan to 16 according to the China Foreign Exchange Trade System (CFETS). Direct trading helps to lower exchange costs and to facilitate bilateral trade and investment.

In August we spoke about the Chinese oil benchmark denominated in yuan which was launched in October 2015, which unlike the Brent and WTI does not settle contracts in US dollars but in yuan. Given China has two companies, CNPC and Sinopec, who are major players in the physical markets for crude oil, it seemed logical that China would wish to enter and influence open market pricing in the oil sector. We mentioned how China was now able to exert influence over the price of oil not least in its efforts to stockpile oil, but in their ability to control the supply and demand to suit them in terms of the price paid.

The latest development with direct trading between the yuan and riyal would suggest in our opinion that we are likely to see future oil sales between China and Saudi Arabia settled in yuan, which would represent a serious blow to the petrodollar.  In July, Saudi Arabia became China’s top crude supplier with imports to China rising 12 percent month-on-month to 1.1 million barrels a day in June, the highest since February.

This latest announcement would also suggest that Saudi Arabia intends flipping to settling its oil trade with China in yuan instead of the US dollar and utilising the yuan denominated oil benchmark. In real terms this is a seismic development in moves to derail the US dollar as the world’s reserve currency. This author would expect other OPEC nations to follow suit in due course.

If Washington regarded the launch of a gold-backed yuan as a declaration of war we should equally regard this as a similar move.  Perhaps this is in part a retaliatory move against Washington, not least over moves to pass the 9/11 bill, which would allow US families to potentially sue Saudi Arabia despite Obama vetoing the legislation. What this author is also aware of is that Washington misappropriated Saudi gold which is why they have now moved the remainder to a secure location, overseen, it is believed, by the Chinese.

What is clear though is that another key swing nation is rotating east and not only towards China. In recent developments, Russia and Saudi Arabia are discussing matters relating to Syria and a cooperation agreement with regards to the oil markets which would appear to freeze out the US oil producers.  We should now pay close attention to Washington’s intentions towards Saudi Arabia which should be quite revealing. We cannot rule out an attempt to overthrow the House of Saud.