Key facts
- China's crude oil import and refined product export policies will shape oil prices through year-end.
- Low Chinese imports in recent months have helped cap price increases.
- China has substantial crude oil reserves, estimated at 1.2-1.4 billion barrels.
- Chinese crude oil imports reached a decade low in June.
- China has begun drawing down its oil inventories.
- Increased refined product exports could necessitate higher crude oil purchases.
China's crude oil import volumes and refined product export pace are expected to be key determinants of oil price trends for the remainder of the year, alongside ongoing supply disruptions in the Middle East. In recent months, China's reduced crude oil imports have helped to temper upward pressure on prices, even amidst significant supply constraints originating from the Middle East.
The market is closely watching China's next moves regarding its crude import and fuel export policies, given its position as the world's largest crude importer. Over the past four months, China has significantly cut its crude oil imports, a response to prices exceeding $100 per barrel and the volatility at the onset of the Middle East conflict. This reduction, amounting to approximately 4 million barrels per day of import demand, played a crucial role in limiting price spikes.
Historically, China tends to reduce its crude oil purchases when prices surpass $80 per barrel and increases them when prices fall into the $60-70 range, seeking favorable pricing. This strategy was evident last year when lower prices allowed China to build substantial crude stockpiles, estimated to be between 1.2 and 1.4 billion barrels in strategic and commercial reserves by the start of the Middle East conflict. These large inventories have enabled China to manage its purchasing more strategically during periods of high prices and constrained supply.
Official Chinese customs data revealed that crude oil imports plunged by 41.3% in June compared to the previous year, reaching a decade low of 7.12 million barrels per day. These low import levels in June were likely arranged in April and May when Middle Eastern producers were charging record-high premiums for crude destined for Asia.
However, a rebound in Chinese crude oil imports is anticipated for the latter half of the year, particularly as prices have eased from their peaks and Middle Eastern producers have reduced their official selling prices. China began tapping its substantial inventories in May, drawing down approximately 500,000 barrels per day, a pace that increased to about 940,000 barrels per day in June. Despite these drawdowns, China still holds significant stocks, according to Goldman Sachs.
Furthermore, China is easing restrictions on fuel exports, capitalizing on high refining margins in a tight global fuel market. If domestic fuel demand remains weak, Beijing may opt to boost fuel exports and refinery runs, which would necessitate increased crude oil purchases. Analysts suggest that increased fuel exports could be a near-term driver of Chinese crude demand, although refiners are required to maintain product inventories at specific levels, preventing them from solely relying on drawdowns to increase exports.