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China’s demand for crude oil imports and the pace of its refined products exports will help shape the trend in oil prices through the end of the year, alongside the supply disruptions in the Middle East.
Decade-low Chinese crude oil imports have eased upward pressure on oil prices in recent months despite the worst supply disruption in the history of oil markets. China’s tumbling demand for crude oil imports was the key demand-side factor in capping the price hikes since the Iran war began.
The market is now increasingly wondering what China will do next and how the immediate crude import and fuel export policies of the world’s top crude importer will influence regional and global oil and fuel markets.
China Helped Cushion The Supply Crisis in the First Half
Over the past four months, China has slashed its crude oil imports, reacting to the $100-plus oil price and extreme volatility in the early weeks of the war.
The weakest Chinese imports in years helped limit the price spikes as China removed about 4 million barrels per day (bpd) of import demand while supply remained constrained at the Strait of Hormuz.
China generally reduces its crude oil imports when prices top $80 per barrel and goes on a buying spree at low oil prices in the $60-70 per barrel range. Beijing is averse to high purchase prices and is always looking for a bargain.
It deployed this strategy last year when $60-70 a barrel oil allowed it to stash more than 1 billion barrels of crude stockpiles. Some analysts estimated that China faced the start of the Iran war at the end of February with as many as 1.4 billion barrels of crude oil in strategic and commercial reserves.
The huge inventory build helped China manage its crude purchases significantly lower amid spiking oil prices in March and April.
China is the world’s top crude importer, but it was also the importer best prepared to weather the global supply crisis triggered by the Middle East conflict. In the year before the Iran war started, China is estimated to have amassed between 1.2 billion and 1.4 billion barrels of oil in commercial and strategic reserves. These could be even higher as the inventories are a closely guarded secret, as are China’s imminent plans about stockpiling or drawing down reserves.
As a result, China has become the swing demand buyer on the global oil market since the beginning of the Middle East crisis in February.
The world’s top crude importer, through very low import volumes in the past months, prevented a major spike in oil prices, as its opportunistic purchases crumbled with the price spike.
China slashed its total crude oil imports to a decade low in June, culminating three months of very low import levels amid high prices and constrained supply from the Middle East. Chinese imports of crude oil plunged by 41.3% in June from a year earlier, to just 29.27 million tons, or 7.12 million bpd, according to official Chinese customs data released on Tuesday.
The decade-low cargo arrivals in June were likely arranged in April and May when Middle Eastern producers had set the price of their crude loading for Asia at record-high premiums to benchmarks.
Demand Rebound in the Second Half?
After the U.S.-Iran memorandum of understanding sank oil prices to $70 per barrel in late June and early July and Middle Eastern producers slashed prices for July and August loadings for Asia, China’s crude oil imports may rebound this month and next, and even in parts of September, supporting demand.
But now that oil hit nearly $90 per barrel again, Chinese refiners may reduce purchases for cargoes arriving after September.
China will use any dips in prices to boost imports as it has already started to tap its huge stockpiles.
Beijing started tapping inventories in May by about 500,000 bpd and continued the drawdowns in June, at a pace of about 940,000 bpd, according to estimates by Reuters columnist Clyde Russell based on official Chinese data of crude imports, domestic production, and refinery throughput.
China last month drew 41 million barrels from inventories, according to estimates in the International Energy Agency’s (IEA) latest monthly report.
Despite the drawdowns, China is not in any rush yet to buy more oil, as it still holds substantial stocks, Goldman Sachs said in a note carried by the Wall Street Journal last week.
But the tipping point could come soon, and China could accelerate buying for July and August, according to analysts at Goldman, also because the Gulf producers have slashed their official selling prices for this month and next.
China is also easing fuel export restrictions and has boosted refined petroleum exports in recent weeks, capturing sky-high refining margins in the tight fuel market. Amid weak domestic fuel demand, Beijing could opt for raising fuel exports and refinery runs, which would necessitate buying more crude oil.
Increased fuel exports would be a near-term driver of Chinese crude demand, Vortexa’s lead China oil market analyst, Emma Li, said last week.
Despite the removal of export restrictions, exports are unlikely to rebound immediately.
“Besides the time required for refiners to secure cargo nominations and arrange shipments, Beijing has retained one important condition: refiners are required to maintain product inventories at or above end-February levels, preventing them from relying solely on inventory drawdowns to increase exports,” Li noted.
By Tsvetana Paraskova for Oilprice.com
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