The Daily Update - The rise of the 'petroyuan'

The ‘petrodollar’ economy, set up in the 1970’s is coming under increasing pressure due to the expansion of the Chinese renminbi (yuan) usage in settling crude trades. The ‘petroyuan’ dates back only as far as 2012 when China signed a USD5.5bn currency swap agreement with the UAE whereby oil imports from Abu Dhabi would be settled in renminbi. Then in 2015, as a result of western sanctions, Russia began accepting yuan payments for all its oil exports to China; also considered an incentive to attract Chinese business away from Saudi Arabian oil imports which are priced in dollars. This trade works in both economies’ favour as Russia would rather purchase goods and services from China than go to the market and exchange the yuan.

Most recently we have heard that worsening relations between the US and Venezuela have pushed the country to price its oil in other currencies; the state-owned PDVSA oil company stated in mid-September that it would look to conduct its transactions in euros, instead of dollars. Although Venezuela's largest crude customer is the US, the recent sanctions have again forced the country to look further afield and it’s allowing trading partners to settle oil transactions in their own currencies; which of course is preferred by the likes of China, which is pushing for the internationalisation of the yuan. Following the announcement from PDVSA, Venezuela announced that it would be pricing its oil in yuan, with the oil ministry stating ‘that Venezuela will implement new strategies to free the country from the tyranny of the dollar’. We are not clear on why Venezuela has chosen the yuan, but we suspect it has something to do with the ~USD60bn loan package from China to Venezuela, in exchange for discounted oil prices. Venezuela is, of course, facing its worst economic crisis and PDVSA is on the brink of collapse, with the sovereign and PDVSA both rated CCC- by S&P and CC by Fitch. As the country’s oil production is somewhat non-existent currently, the change in pricing structure to yuan may have little impact on the currency itself, however, the de-dollarisation is still seen as an audacious move.

Meanwhile, as its largest consumer, China has recently reopened the conversation with Saudi Arabia to accept yuan payments for its oil. This is a contentious conversation, as even though the US is considered the Kingdom’s largest competitor, the Saudi currency is pegged to the dollar; thus no change is expected in the medium-term. However, at the latest BRIC gathering the idea of a new gold-backed, yuan-based oil benchmark has been widely accepted by the other nations. This new oil index, which is based in Shanghai, is effectively the same as the current Brent and WTI benchmarks; however, futures contracts will be priced in yuan as opposed to US dollars. As China is the world’s largest oil importer this index could be viewed with the same prominence in due course, and would almost certainly result in reduced usage of petrodollars, thus increased petroyuan usage. The ‘gold-backed’ part of the equation could be favoured by some exporters, like those in the Middle East, who may prefer to receive payments in gold. We will continue to watch this space as the eventual knock-on effect, of such a bold move, on the dollar, oil, currency, gold and commodity markets, for example, could be huge.