China's oil imports have plunged during the Iran war. How much will they recover?

Beijing: For five years, China imported an average of 11.5 million barrels of oil per day. Since April, it has averaged just 8 million bpd. The ​speed at which China has slashed imports - shipments fell to 40% of ​pre-Iran war levels in June - has kept a lid on global prices and freed up cargoes for other countries.

Market observers are ​puzzled over how the world's biggest oil importer achieved that reduction and want to know how permanent the drop in demand is.

"It's the million-dollar question," said Michal Meidan, head of China Energy Research at the Oxford Institute for Energy Studies. "There's a massive level of uncertainty because we don't fully understand what has happened."


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The uncertainty reflects the lack of visibility into China: the size of its stockpile is a state secret, its oil companies are ‌opaque and its data is ⁠patchy.

Some analysts ⁠predict China's oil imports could ultimately decline by 1 million to 2 million bpd after the war from pre-conflict levels, a sharp drop in demand for a country that for decades drove growth in global oil consumption.

Following are factors ​to consider:

WHITHER CHINESE FUEL DEMAND?

The war has revealed a Chinese transport system able to run on less fuel than thought possible, which has significant implications for crude imports given roughly half are refined into transport fuels. What's less clear is whether the war will greatly accelerate electric car sales, especially as petrol prices have fallen back to pre-war levels after surging by more than a quarter. Electric and hybrid cars rose to a record 62% of new car sales in June. However, hundreds of thousands fewer cars have been sold this year due to a weak Chinese economy and slowing electrification of a fleet that is still 87% petrol-powered. It does, however, look like the war will accelerate the destruction ⁠of diesel ‌demand after the government launched a plan in June to electrify trucking, aiming to have some busy short-haul routes 80% electrified by 2030.

Consultancy Rystad expects ​Chinese gasoline and diesel use to ​drop 6.6% and 6.9%, respectively, versus their forecasts of 3.5% and 3% before the war.

"The crisis has acted as a trigger," says ⁠Ye Lin, an analyst at Rystad. "It helped consumers build more confidence in electric cars and trucks."

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WHAT ABOUT INDUSTRIAL DEMAND?

If ​the Iran war further slows China's domestic growth or its export markets, it poses further risk for the country's oil demand, ​says Meidan from the Oxford Institute for Energy Studies. China's property crisis has battered the construction industry, which has dented diesel demand for several years, and property prices are still falling. A structurally weaker economy could also hit demand for plastics and other petrochemicals, hurting refiners and reducing oil use as the sector faces competition from coal-based alternatives.

"Something we're not thinking enough about is the broader economic story," Meidan said. "That is a really big question that will impact Chinese oil demand and industrial activity."

WHAT ROLE DOES STOCKPILING PLAY?

Beijing's reserve-building campaign last year, which positioned China well to absorb the shock of the closure of the Strait of Hormuz, inflated crude imports.

That appears to have ended since the war, but determining when, and to what degree, China might resume stock-building ‌is complicated by uncertainty over Beijing's aims and the size of its reserves, say analysts. Beijing does not publish targets for its reserves nor how much is stored. Reuters reported last year that China was building a series of new storage tanks. In May, Premier Li Qiang called for even more capacity during ​a visit to a ​reserve site.

"Although there is demand destruction, there will ⁠still be incremental crude oil imports that China will use to fill its strategic petroleum reserves," said June Goh, senior analyst at Sparta Commodities.

While structural changes including electrification could lower monthly crude imports to somewhere between 8 million to 9 million bpd once the Gulf normalises, Goh says another stockpiling campaign could lift them back to the 9.5-million to 11-million-bpd range.

During China's stockpiling ​campaign last year Brent crude was trading between $58 and $83 per barrel, versus the current price of about $85. Analysts say it could resume again should prices fall below $70.

WILL THE FUEL EXPORT VALVE REVIVE OIL DEMAND?

Whatever the new normal, getting there requires certainty about supply from the Gulf and an end to Beijing's wartime restriction on fuel exports, say analysts. Without exports to absorb surplus gasoline, diesel and jet fuel, Chinese refiners have little incentive to buy more crude and raise output. Beijing lifted those curbs for July but could reimpose them for August now that fighting has resumed in the Gulf. Longer term, exports will also help determine where China's crude imports settle. If overseas sales absorb excess fuel and petrochemicals, refineries may need more oil imports. China tightly manages fuel shipments under a fuel export quota system.