The Unexpected Resilience of Global Oil Markets
A significant drop in China's crude oil imports during the conflict with Iran has played a key role in keeping oil prices stable and maintaining the health of the global economy. This development has raised questions about where the missing three million barrels of oil are going, as well as how long this trend can continue.
China is experiencing several changes that are contributing to the decline in oil imports. Fewer people are driving gasoline-powered cars, and more are choosing trains over planes. Additionally, the country is reducing operations at facilities that convert crude oil into feedstock for materials like plastics. Beijing is also beginning to draw down its oil reserves.
The question remains: how long will these import cuts last, and what would happen if China needs to start buying more oil again?
When the U.S. and Israel attacked Iran and the Strait of Hormuz was effectively closed, many analysts anticipated that this could push oil prices to between $150 and $200 per barrel. This scenario was expected to trigger a global recession. However, despite the ongoing conflict and the strait being closed for nearly four months, the Brent crude benchmark is currently below $100 a barrel.
This unexpected resilience can be attributed to actions taken by two of the world’s most influential players: the United States, the largest oil producer, and China, the largest importer. The U.S. increased its crude oil exports in April and May to over five million barrels a day, which is a significant increase from the average of about four million barrels a day in recent years. Meanwhile, China has been cutting its imports.
According to Chinese official customs data, crude oil imports averaged 7.8 million barrels a day in May, including oil arriving via pipeline from Russia. This is a decrease from around 11 million barrels a day in previous years. The missing three million barrels represent roughly the combined daily oil consumption of Italy and France.
What is particularly intriguing is the lack of major visible disruptions to daily life in China. Tourists are still traveling, factories are still operating, and store shelves remain well-stocked.
“It’s a bit of a mystery. I have this feeling—is this the whole story?” said Erica Downs, a scholar at Columbia University who has researched China’s oil refineries.
The Role of Oil Reserves
The mystery behind the missing oil cannot be fully explained by the drawdowns in China’s oil reserves. It was only in May that Chinese users began significantly drawing from the nation’s various crude inventories, starting at around 500,000 barrels a day, according to maritime risk and intelligence firm Vortexa. The U.S. drew down just over one million barrels a day from commercial crude oil stocks last week.
Before the Iran war, China had been stockpiling cheap Russian and Iranian oil. Analysts estimate that the country’s total crude reserves range between one billion and 1.4 billion barrels, enough to cover at least several months of imports. However, Beijing does not disclose the exact figure.
Shell Chief Executive Wael Sawan noted at The Wall Street Journal’s CEO Council Summit in London that China had been "picking up a lot more than they needed through filling up storage." He added that this allows Beijing to modulate its demand.
Finding Alternatives
China is actively seeking ways to reduce its reliance on oil. Electricity-powered high-speed rail and electric vehicles have increasingly replaced short-haul flights and gasoline cars. China’s electricity largely comes from coal and renewable energy sources.
During the May Day national holidays, air passenger traffic declined by about 5.7% compared to the same period last year. However, rail passenger traffic increased by 4.6%, according to China’s Ministry of Transport. EV charging volume on highways surged by 53% during the holiday period, according to data from China’s National Energy Administration.
The Ministry of Transport estimated that an average of 15.4 million EVs traveled each day during the May holiday period, accounting for about a quarter of all vehicles on the road and representing a 33% increase from a year earlier.
“China’s transportation sector is now more diversified than it was during previous oil shocks,” said Emma Li, a China analyst at Vortexa. She noted that China also imposed export restrictions on transportation fuel earlier in the Iran war, which reduced exports by about 500,000 barrels a day.
Refiners Cut Back
A clue to the missing-three-million-barrel mystery lies in China’s petrochemical plants. Much of the country’s imported oil doesn’t end up in car gas tanks but is used to produce feedstocks such as ethylene, which are essential for everyday plastics, packaging, and industrial goods.
Tom Reed, vice president of China crude at Argus Media, noted that while demand for gasoline and diesel has been falling in China due to the EV revolution, crude oil demand has continued to grow. This is because China has expanded its petrochemical manufacturing capacity in recent years.
Both state-owned and private-sector refiners have significantly reduced their operations, according to analysts. By May, refinery run rates had dropped by 10 percentage points, and run rates at steam crackers—used to break down heavy hydrocarbon feedstocks like naphtha into lighter chemicals—fell by 7 percentage points, according to Argus Media.
However, China is facing a shortage of ethylene and other feedstocks, according to Reed. This could eventually lead to higher manufacturing costs and negatively impact the economy. Producer prices, which had been declining for years, rose by 3.9% in May. If inflationary pressures worsen, this could hurt China’s globally competitive exporters.
The Outlook
Some analysts believe that China may need to increase its purchases to sustain its economy during the summer. Saad Rahim, chief economist at Trafigura, noted that "indications are that China’s gasoline demand is down materially," though it is difficult to determine how much of the decline is structural versus temporary. He also pointed out that China has been increasingly using coal to produce petrochemical feedstocks.
Traders will closely monitor whether China returns to buying crude spot cargoes in the next week or two, according to Rahim. “It’s just the buying cycle. If you want crude to be delivered in the summer, you start buying now,” he said.
Vortexa’s Li predicts that Chinese users will further tap into their reserves, and the surprising resilience could continue for quite some time. She explained that refiners are better off using reserves than purchasing expensive crude on the spot market, which often costs more than what they can charge for refined products.
“Based on our calculation, even if the inventory drawdown rate picks up to more than one million barrels a day, China’s commercial reserves alone are enough to sustain another six months,” she said.
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