Chinese Refiners Are Absorbing Much of the Hit From Hormuz Shutdown
Many oil market observers have been baffled by the consistently low pricing for crude benchmarks since the start of the Strait of Hormuz crisis knocked out 12-15 million barrels per day of Middle Eastern supply. Instead of soaring upwards on an updraft of inelastic demand, Brent prices have hovered in the range of $95-110 per barrel, depending upon the market's changing expectations around the reopening of the strait. Part of the reason has been accelerated demand destruction in developing economies, but an even more significant element has become clear with new statistics on Chinese imports. China, a leading consumer of Mideast oil, has reduced its imports from its usual average of 11 million barrels per day down to just 6.6 million bpd in May, absorbing roughly one third of the shortage in the seaborne-traded market.
"China’s sharp decline in #crude imports has unintentionally eased feedstock tightness across Asia. With May imports tracking near 6.6 mbd, the lowest since 2016, more Middle Eastern, Russian, African and Atlantic Basin barrels have become available to refiners elsewhere," commented consultancy Kpler.
Forward data suggests that China's imports will continue to stay in the same range through June, buffering a tight global energy market for at least one more month. The question for global oil markets: how - and for how long - will Chinese policymakers and refiners be able to sustain the cuts?
The key to the drop in seaborne imports is in fact a drop in consumption, starting with 20 percent run cuts at state-owned refineries and drawdowns on commercial crude oil stocks. One well-known commodity trader also points to the shift in refiners' product yields. On state orders, China's refiners have shifted yields hard towards fuel feedstocks for blending gas and diesel, reducing output of petchem feedstocks like naphtha as a consequence. Chinese coal-to-chemical plants have made up some of the gap, but not all. The reduced supply has had an enormous impact on Chinese petchem manufacturers, which began idling capacity in response to soaring feedstock prices in March and April.
If this equation changes, China could begin leaning on its vast strategic reserve of stored crude, or return to importing cargoes at a higher rate. Kpler cautions that a rebound in Chinese imports could affect the balance of the market, and quickly.
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The other remarkable change is the uptick in U.S. crude oil and refined product exports, which have risen by about 2-3 million barrels per day since the start of the conflict - driven in part by releases from the U.S. strategic reserve, purchased by traders and sold overseas.
"The market has shown a lot of resilience, but it is running by drawing on inventories while awaiting a breakthrough on Hormuz," Adi Imsirovic, an oil trader and an associate at the Center for Strategic and International Studies, told Reuters last week.