- China has cut oil imports by about 25% from prewar levels amid supply shortages
- Chinese state oil firms are reselling cargoes, indicating unexpected surpluses
- China's commercial oil stocks have increased despite the import reduction
Facing an unprecedented shortage, the oil market is pulling every available lever to rebalance supply and demand.
Some are well known - bypassing the Strait of Hormuz using pipelines, releasing emergency stocks and allowing high prices to kill consumption.
But there's another force that's equally important and largely unmentioned - China.
Quietly, Beijing has slashed its oil imports by about a quarter from prewar levels. The impact is clear - Unexpectedly, more crude is available to the wider market, reining in oil benchmarks close to the key $100-a-barrel level despite 60-plus days of conflict in the Persian Gulf.
But the mechanics behind the import swing - crucial to assessing its sustainability - are far from clear.
Deciphering the vast Chinese energy industry is difficult, even when the fog of war isn't obscuring the picture further.
Oil traders fill the gaps left by patchy official statistics by tracking tankers offloading and uploading in the country, measuring stocks using satellite imagery and by talking to their own on-the-ground contacts for clues.
Over recent weeks, industry executives have noticed something odd: Chinese state-owned oil companies have been reselling some of their oil cargoes to European and Asian rivals.
The behavior suggests surpluses - odd during a supply shortage. The shift has not only capped benchmark oil prices, but also helped to trigger a collapse in the premia that traders pay above them to secure physical crude.
Barrels that in early April went for $30 above benchmark prices are now changing hands at premiums as low as $1. Talk of discounts has even started to emerge.
Tanker-tracking data gives the same anomalous surplus signal. Vortexa, a commodity intelligence firm, estimates that China is buying just 8.2 million barrels a day of crude from overseas, down from a prewar level of around 11.7 million.
The 3.5-million barrels a day swing almost matches the total consumption of Japan and is double the amount supplied by the United Arab Emirates pipeline that circumvents Hormuz .
Simply put, it's huge, perhaps the second- or third-largest factor rebalancing the oil market today, behind only Saudi Arabia's own pipeline bypassing the strait and the use of the strategic petroleum reserves of the US and Japan.
The import drop might make sense if Chinese commercial inventories were falling sharply, or if Beijing had tapped its strategic petroleum reserves.
But neither is happening. Instead, commercial stockpiles have continued to increase in recent weeks, according to satellite data.
What Beijing did was ban exports of refined products, effectively allowing refineries to process less crude to meet domestic demand. But the policy has now been reversed, suggesting the country sees enough fuel availability.
So how is China importing far less crude than before without running down stocks? In the past, the country clearly bought more oil than it needed, building a huge emergency stockpile.
Today, China has nearly 1.4 billion barrels in its reserves, well above the 400 million of the US and Japan's 260 million.
On average, China probably bought one million barrels a day more than it needed last year. By simply stopping beefing up the reserve, China can cut imports a lot without affecting its underlying oil needs.
The shift can explain, perhaps, a third of the import cut. But the rest? Here's where oil traders speculate with different theories.
One argument says that Chinese economic activity is weaker than previously thought, and thus oil consumption growth is lower.
What's the catalyst for that slowdown? Perhaps the impact of the war on several of China's clients in the region, including the Philippines, Vietnam and Thailand.
On top, the increase of electric vehicles, improved public transportation and the option of working from home have made Chinese households better able to cope with higher oil prices.
Unlike some other nations in the region, China hasn't announced any emergency action to rein in demand, like adopting a four-day work week for government employees or promoting carpooling.
The International Energy Agency, relying on preliminary data, estimates that Chinese oil demand slipped into a modest year-on-year contraction in both March and April, down by about 110,000 barrels a day to about 17 million barrels.
While the drop is impressive when compared with the exuberant growth of the country's consumption in the past, it isn't nearly enough to explain why imports have fallen so much.
Perhaps, then, Chinese oil demand is contracting far more sharply than currently thought? The key, some traders reckon, is the inscrutable petrochemical industry - the sector that has contributed the majority of oil consumption growth over the last five years.
In petrochemicals, China is unique. On top of its traditional industry that uses oil and natural gas as feedstock, it has parallel production that relies on coal.
Since the war started in late February, coal-to-chemicals profit margins have improved markedly.
The industry had typically operated with plentiful spare capacity, so there's room for a significant shift to coal from oil as a chemical feedstock.
Hard data is scarce but, anecdotally, petrochemicals plants transforming coal into plastics like polyethylene, polypropylene and polyvinyl chloride have been running hard for the last 60 days, in turn reducing consumption of traditional feedstocks such as ethane and naphtha.
So maybe China has managed to rely far more on coal-to-chemicals than previously thought.
Another possible explanation is that it's running down hard-to-track inventories of semi-finished plastics and other chemicals, making the recent drop in oil consumption in the petrochemical industry an unsustainable one-off.
Perhaps there are more banal explanations. Although oil traders try to estimate Chinese inventory data with the use of satellite data, maybe everyone is missing locations and stocks are, in fact, falling.
The oil market is full of chatter about China quietly tapping its strategic reserves, starting by using underground caverns that no one can see using satellites. Maybe.
Time lags may be playing a role; Chinese domestic oil production has been increasing, too, perhaps helping to plug any gaps.
But make no mistake, China is rebalancing the oil market today. The bigger question is for tomorrow: If the country can reduce imports so drastically without, apparently, having to take extreme measures, what does that say about the future of oil consumption there? Nothing positive for the bulls, certainly.
(By Javier Blas)
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
