China Buys More Oil, Adding Pressure to Tightening Market

China is showing early signs of stepping up imports of crude oil after months of subdued buying amid the US-Israel war on Iran, threatening to erode a buffer that has helped prevent a larger surge in global oil prices.

But analysts do not expect China to quickly return to its pre-war import levels, as elevated crude prices could squeeze margins for Chinese refineries and the country’s stockpiles are still large enough to last for several months.

Signs of a rebound in Chinese demand emerged in August, when China’s crude imports rose 6.2 per cent compared with the previous month to hit 37.9 million tonnes, according to Chinese customs data. The figure was the highest import level seen for four months, though still more than 23 per cent lower than a year earlier.The recovery has continued this month, with China’s crude imports running at 7.84 million barrels per day (bpd) in September, up from 7.25 million bpd the previous month, according to trade intelligence firm Kpler. A year ago, the figure was 9.76 million bpd.

The uptick in Chinese purchases has come amid renewed turbulence in the oil market, as the conflicts in Ukraine and the Middle East cause further disruptions to global supplies. According to Kpler, China’s imports from Iraq shot up from 177,000 bpd in August to over 1 million bpd this month, but its purchases from Iran and Saudi Arabia are set to decline.

“A recent partial rebound in Chinese import demand coincided with increased uncertainty regarding crude oil supply availability from the Middle Eastfollowing attacks on Saudi Arabia’s East-West pipelineand Russia due to Ukrainian attacks on the Novorossiysk export terminal,” said Ivan Ryabov, head of oil trading analytics at Kpler.

“As two major exporters with remaining spare crude production capacity, these disruptions created upwards pressure on prices and raised supply security concerns for importing countries.” Chinese firms “have held back on buying for several months, but have come back to the market to reduce their drawdown rate and support increased crude runs to replenish domestic product inventory”, said June Goh, a senior oil market analyst at Sparta.

The return of Chinese buyers comes after months of weaker imports, which helped partly offset a global supply shortfall and limit upwards pressure on prices after the outbreak of the Iran war. China’s crude imports from April to August were about 3.2 million bpd lower than a year earlier, largely because refiners drew on inventories and consumers increasingly switched to new-energy vehicles, according to a report by Huatai Securities published on Tuesday.

But that China buffer is now weakening as inventories fall.

China’s vast crude oil stockpiles have been declining since April, with inventories falling from about 1.25 billion barrels to 1.14 billion barrels in September, data from Kpler showed. “China’s oil inventories have fallen significantly from the levels built up before the Strait of Hormuz closure, making it harder to sustain the ‘China buffer’ that had helped keep oil prices in check,” the Huatai Securities report said.

Goh agreed that China’s muted crude buying in recent months had helped contain upwards pressure on oil prices, while its return had partly contributed to the recent gains in global oil benchmarks.

“Now, the crude market cannot rely heavily on China to rebalance again,” said Sun Jianan, a senior oil analyst at Energy Aspects.

Even so, analysts do not expect Chinese buyers to return to the market aggressively.

“We see no imminent risk to China’s crude supply,” Sun said, adding that China still had ample crude stocks that could meet more than 80 days of demand and cushion potential supply losses.