How China Could Veto $100 Oil


Drivers are starting to feel the pain at the pump again as oil moves closer to $100 a barrel. Supply cuts from Saudi Arabia and Russia could push global oil prices higher still.

Drivers are starting to feel the pain at the pump again as oil moves closer to $100 a barrel. Supply cuts from Saudi Arabia and Russia could push global oil prices higher still.

But China, the world’s top crude importer, will have a say too. And while Chinese growth appears to have improved modestly in August, there are still two key reasons markets might be overestimating the likely extent of Chinese demand, and its impact on global benchmarks such as Brent oil in late 2023.

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But China, the world’s top crude importer, will have a say too. And while Chinese growth appears to have improved modestly in August, there are still two key reasons markets might be overestimating the likely extent of Chinese demand, and its impact on global benchmarks such as Brent oil in late 2023.

First, China has moved aggressively into discounted Russian oil in recent months. Second, Chinese crude oil imports still appear to be running well ahead of fundamental demand—and its exports of refined products, particularly diesel, are rising sharply.

China has, from the beginning of Ukraine war, made it clear it considers Western sanctions on Russia to be illegitimate—and continues to import large quantities of Russian oil. But since December 2022, when the U.S. and Europe agreed to enforce a cap on Russian oil prices by leveraging their control of the global shipping insurance business, Chinese purchases have skyrocketed.

Total Chinese crude imports were the second highest on record in August, according to figures from data provider CEIC. But excluding imports from Russia, they were only up about 2% from December 2022 levels. Imports from Russia were up about 60% over that same period, and are now over 30% larger than those from Saudi Arabia, China’s number two supplier.

With global benchmarks heading skyward, China’s relations with the West as fraught as ever, and Russian crude still trading at a significant discount to alternatives, there is every reason to expect this trend to persist. China is importing Russian oil at a discount of $28 per metric ton to its average crude import price overall, according to data from CEIC—far down from its $61 discount in May, but still substantial. And as long as that gap persists, it will keep acting as something of a shock absorber for Brent and other global price benchmarks.

Moreover, there is no guarantee that Chinese imports will keep rising rapidly in any case. For most of 2023, China appears to have been aggressively filling its oil reserves, taking advantage of lower prices. China doesn’t release regular data on its crude reserves like the U.S., but in the second quarter the nation produced and imported about 14 million more metric tons of crude than it refined, according to CEIC data.

And production of refined products such as diesel has also been suspiciously fast in 2023 relative to traditional drivers of demand like the property sector and heavy industry. With global fuel prices back up again, those products are leaking back out into world markets with a vengeance: China’s net petroleum product exports nearly tripled in August to 2.4 million metric tons, CEIC data shows. In June, when prices were much lower, China only exported 109,000 tons of product on net.

To be sure, Chinese growth could always surprise on the upside in late 2023—although currently a stabilization rather than a strong rebound looks more likely. And China may have other reasons to keep filling its oil reserves, even at higher prices, given Beijing’s increased focus on security and self-reliance—and still-strained relations with the West.

But anyone betting on a China-driven oil price spike in late 2023 is likely to be disappointed.

Write to Nathaniel Taplin at nathaniel.taplin@wsj.com



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