Key facts
- China's oil demand has rebounded, driving Shanghai crude prices above $100 and threatening to push Brent crude past the same level.
- The shift in Chinese demand is intensifying competition for alternative oil supplies due to disruptions in the Strait of Hormuz and limited Iranian exports.
- Chinese buyers are actively seeking crude from Africa, Canada, and Latin America, lifting prices for various grades.
- Improved refinery margins and commercial restocking in China are encouraging increased crude purchases.
- Goldman Sachs predicts Brent could reach $120 per barrel if Middle East shipping disruptions escalate.
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.
During the "actively kinetic" phase of the Iran war, when shipments through Hormuz were effectively halted, Chinese oil demand unexpectedly evaporated, contributing to a potential shortage of 10-15 million barrels per day. This was evidenced by a collapse in the Brent-Shanghai crude spread, which fell to as low as -$20 in late April. However, Shanghai crude has recently surged, trading at a premium to Brent and indicating the end of the weak demand period.
China, the world's largest oil importer, is now aggressively bidding for crude across African, Canadian, and Latin American markets. This scramble is pressuring smaller Chinese refineries that previously relied on discounted Iranian barrels. 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.
While Chinese seaborne crude imports are still below pre-war levels, trending toward 10 million barrels per day, the Shanghai crude spread suggests imports are aggressively rising. 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.