During the Iran war, the demand for imports of crude oil in China, the world’s largest importer, has sharply declined. Latest data shows that China’s crude oil imports in June dropped to a near 10-year low, with import levels equivalent to only 40% of pre-war levels.
In the past five years, China has been importing an average of 11.5 million barrels of crude oil per day; however, since April of this year, the daily import volume has decreased to approximately 8 million barrels.
Some analysts predict that even after the war ends, China’s crude oil imports may still ultimately decrease by 1 to 2 million barrels per day compared to pre-conflict levels. For China, which has been driving global oil consumption growth for decades, this would represent a significant demand contraction.
This significant drop in import volume not only suppresses global oil prices but also frees up more oil supplies for other countries. However, market observers find it challenging to determine whether this demand decline is a temporary fluctuation or a possible long-term structural change.
Michal Meidan, Head of China Energy Research at the Oxford Institute for Energy Studies, told Reuters, “This is a ‘million-dollar question.’ There is currently great uncertainty because we do not fully understand what has happened.”
The difficulty in assessing how long the demand decrease will last is also related to the lack of transparency in China’s energy data. The scale of China’s oil reserves is classified as a state secret, and the operations of oil companies are opaque, with incomplete data available.
The ongoing weakness in the Chinese economy is seen as a significant factor making it difficult for oil demand to fully recover. Reuters points out that 87% of existing vehicles in China still use gasoline. With the economic slowdown, this year has seen a decrease in car sales by hundreds of thousands, leading to an overall decline in automobile sales that may further dampen gasoline demand.
Meidan stated that if the Iran war further slows down China’s domestic economic growth or impacts its export markets, Chinese oil demand will face more downside risks.
The property crisis in China has already severely impacted the construction industry and weakened diesel demand for several years, with house prices still declining.
Moreover, if China’s economy shows structural weakness, the demand for plastics and other petrochemical products may further decrease, affecting refineries and reducing oil consumption. The Chinese petrochemical industry is also facing competition from “coal-based substitutes,” which could further limit the recovery of oil demand.
Meidan said, “One aspect that we have not paid enough attention to is the broader economic situation. This is a very significant issue that will affect China’s oil demand and industrial activities.”
This war has shown that China’s transportation system can continue to operate with lower fuel consumption than previously expected by the outside world. As about half of China’s imported crude oil is refined into transportation fuels, a reduction in fuel consumption in the transportation sector would directly affect crude oil imports.
Data shows that in June, electric and hybrid vehicles accounted for 62% of new car sales in China, reaching a historic high. In June, the Chinese government launched a plan to electrify freight trucks with the goal of achieving 80% electrification on busy short-haul routes by 2030.
Currently, it appears that this war will accelerate the contraction of fuel demand. Rystad Energy forecasts that Chinese gasoline and diesel usage will decrease by 6.6% and 6.9%, respectively, exceeding pre-war predictions of 3.5% and 3%.
Analyst Ye Lin from Rystad Energy stated, “This crisis has become a catalyst. It has enhanced consumers’ confidence in electric vehicles and electric trucks.”
Another key variable is China’s oil reserves. Beijing had been working to increase strategic oil reserves last year, allowing China to better withstand the impact of the closure of the Hormuz Strait, but this also elevated oil import levels at that time.
The reserve action seems to have halted after the war broke out. However, as Beijing does not disclose oil reserve targets or actual storage volumes, it is difficult for outsiders to assess when and to what extent China will resume increasing reserves.
Reuters reported last year that China was constructing a series of new oil storage facilities. In May this year, Chinese Premier Li Keqiang inspected a reserve base and called for further expansion of storage capacity.
June Goh, an analyst at Sparta Commodities, said, “Despite the contraction in demand, China will still increase some crude oil imports to fill strategic oil reserves.”
During China’s push to increase oil reserves last year, Brent crude prices ranged between $58 to $83 per barrel, now hovering around $85 per barrel. Analysts suggest that if prices fall below $70 per barrel, China may once again initiate actions to increase reserves.
In the short term, Chinese crude oil demand is also constrained by policies limiting refined oil exports. Beijing restricted fuel exports during the war, causing refineries to lack the drive to increase crude oil purchases and raise production.
While Beijing has lifted the related restrictions for July, with the Middle East conflict resurfacing, similar restraints may be reimposed in August.
Analysts point out that after the Middle East situation normalizes, structural factors like the electrification of transportation will impact China’s daily average crude oil imports to be between 8 to 9 million barrels; however, if there is a resurgence in reserve-building actions, daily imports might rebound to 9.5 to 11 million barrels.