Key facts
- China's oil demand has rebounded, driving Shanghai crude prices above $100.
- Independent Chinese refiners face pressure from rising oil prices and reduced supply from Venezuela and Iran.
- China's August crude oil imports increased by 6.2% from July, though still down year-on-year.
- The global fuel squeeze is expected to worsen due to Middle East conflict.
- Chinese refiners may turn to Russian crude, but its prices are also increasing.
Brent crude prices are nearing $100 per barrel as China's demand for oil rebounds, signaling a significant shift from a period of subdued buying that had helped restrain global prices. This renewed demand intensifies competition for alternative supplies amid ongoing disruptions in the Strait of Hormuz and limited Iranian exports.
Chinese independent refiners may be about to start reducing their processing rates as international oil prices rise and supply from major exporters such as Venezuela and Iran dries up as a result of U.S. foreign policy decisions. The so-called teapots are more sensitive to adverse oil market changes due to their refining margins being slimmer than those of state-owned majors. These margins have already fallen to breakeven, from around $10 per barrel in early July.
China imported 37.93 million tons, or 8.93 million barrels per day of crude oil in August, up by 6.2% compared to July, and further recovering from the decade-low seen in June. The August import level was still 23.4% lower compared to the same month last year, but it’s a marked improvement from the June lows of just 7.1 million bpd. 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.
With Venezuelan and Iranian crude all but gone, Chinese refiners will probably lean more heavily on Russian crude in the coming weeks. However, Russian crude prices are also on the rise on the futures market, in tune with all the other blends that trade internationally, which will likely put a lid on demand.
Traders report that Congo's Djeno crude is being offered to Chinese buyers at premiums of up to $20 a barrel over ICE Brent, a significant increase from previous weeks. Chinese buyers are also acquiring tanker loads from Canada, Brazil, and Argentina, and demand has boosted prices for Russia's ESPO crude, while Asian buyers are pushing Dubai crude futures towards $100 per barrel.
Improved refinery margins, the resumption of fuel exports, and commercial restocking are encouraging refiners to ramp up purchases, according to Liao Na, founder of GL Consulting. However, Liao notes that this robust buying is largely driven by refiners taking advantage of decent margins and active restocking, not necessarily stronger underlying demand.
Goldman Sachs energy expert Daan Struyven anticipates that China's ability to adjust purchases based on prices will help moderate crude price spikes. However, he cautioned that Brent could rally to as much as $120 a barrel if attacks on shipping in the Middle East increase. Struyven recommends investors hedge geopolitical risks by going long in global natural gas and refined-oil products, citing larger supply shocks in those markets compared to crude.