China’s Crude Import Surge Threatens to Unnerve Fragile Oil Markets
With imports plunging to a decade low in June, China’s return to the market coincides with heightened geopolitical risks, raising the spectre of significant price volatility in the coming quarters.
China is poised to resume crude oil purchases after slashing imports to a decade low in June, a move that removes a significant demand buffer previously helping to stabilise global prices. Official customs data reveals that imports fell by 41.3 per cent year-on-year to 7.12 million barrels per day, the lowest level since October 2016. This reduction coincided with strategic reserve drawdowns, estimated by the International Energy Agency at 41 million barrels in May.
The potential return of Chinese demand occurs against a backdrop of heightened geopolitical tension, including the collapse of a US-Iran memorandum of understanding and ongoing disruptions to shipments through the Strait of Hormuz. With global inventories at critically low levels and Brent Futures flipping to backwardation, analysts warn that the convergence of renewed Chinese buying and supply risks could drive prices higher.
China’s ability to curtail imports during the initial months of the Middle East crisis prevented a major spike in oil prices despite the loss of significant daily flows through the Hormuz strait. However, the window provided by the previous agreement, which allowed Middle Eastern producers to clear accumulated crude, has abruptly shut down due to renewed hostilities. Gulf producers have since slashed their official selling prices for July and August, a move that may accelerate China’s return to the market.
Goldman Sachs noted in a report that while China is not yet in a rush to buy more oil due to substantial remaining stocks, the tipping point could arrive soon. The investment bank suggested that Chinese buyers could accelerate activity for the coming months, particularly as the cost of supply decreases and the need to replenish reserves becomes more pressing.
Amrita Sen of Energy Aspects warned that the world has drawn down approximately 600 to 700 million barrels of oil stocks since the crisis began. She cautioned that if the current supply-demand imbalance persists, the most severe price impacts may materialise in late Q3 or early Q4, as market complacency regarding Hormuz flows is severely tested.
