China is essentially doing the heavy lifting on its own when it comes to cutting Asia’s crude oil demand, compensating for reduced shipments out of the Middle East as a result of the ongoing war with Iran, according to a column by Clyde Russell from Reuters.
The world’s largest oil importer reported crude arrivals of 8.41 million barrels per day in July, an improvement from June’s near-decade low of 7.12 million barrels per day, though still 24.3% below the levels seen in July of last year. Combined, June and July imports averaged 7.78 million barrels per day, a figure 4.21 million barrels per day lower than the 11.99 million barrels per day average recorded over the three months leading up to the end of February.
The United States and Israel launched attacks on Iran on February 28, and the conflict escalated to the point where the Strait of Hormuz was effectively shut down, cutting off a waterway that had previously carried roughly a fifth of the world’s crude oil and refined petroleum products. While Saudi Arabia and the United Arab Emirates have managed to increase shipments from ports outside the strait, overall flows from the region have still fallen by around 5 million barrels per day.
Since the bulk of Middle Eastern crude exports flow to Asia, the world’s top oil-importing region, Asian crude arrivals have dropped significantly as a result.
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According to data compiled by commodity analytics firm Kpler, Asia’s total oil imports reached 22.82 million barrels per day in July, an improvement from April’s low of 18.77 million barrels per day, the weakest figure since November 2015, but still roughly 4 million barrels per day below the 26.89 million barrel per day average recorded in the three months before the Iran conflict began.
The data suggests that the drop in Asia’s overall imports over the past two months has been almost entirely driven by the decline in China’s own imports.
Part of China’s reduced buying likely reflects price volatility, with benchmark Brent crude futures hitting a four-year high of $126.41 a barrel on April 30, right around the time June and July cargoes would typically have been arranged.
China has historically pulled back on purchases when prices spike, though the scale of this particular decline has been unprecedented. Analysts believe China has ample capacity to sustain lower import levels for an extended period, given its enormous crude stockpile, estimated at a minimum of 1.2 billion barrels and potentially significantly higher.
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The key question now is how long China is willing to continue serving as the balancing force for Asia’s crude oil market. Imports are expected to see a modest recovery in August as cargoes that managed to exit the Strait of Hormuz during a brief ceasefire between the U.S. and Iran are finally delivered.
Kpler estimates China’s imports from the Middle East will rise to 2.71 million barrels per day in August, up from 2.43 million in July and 1.42 million in June, the lowest figure in Kpler’s records dating back to 2013. Total crude imports for August are currently estimated at 5.97 million barrels per day, though that number is likely to climb as more cargoes are assessed throughout the month, with August imports expected to ultimately surpass July’s total.
September figures are likely to prove more telling, as flows from the Middle East become further constrained following the collapse of the ceasefire agreement between President Trump and Tehran and the return of sharply reduced shipments through the strait.
Even if current efforts to restore vessel traffic through Hormuz succeed, it will take several weeks for export volumes to ramp back up, and additional weeks beyond that before those tankers actually reach Chinese ports. In the meantime, Chinese refiners have the option of either continuing to suppress demand for imported crude and draw down existing inventories, or seeking out cargoes from exporters located outside the Middle East.
