Oil prices in China have jumped to record highs, as refiners in the world’s biggest crude importer step up a hunt for supplies amid widening fears over the security of exports from the Middle East.
Oil futures in Shanghai were trading at $129 a barrel on Wednesday, above their peak of $121.80 in the first weeks of the Iran war. The price has jumped 14 per cent since the end of last week when Saudi Arabia was forced to shut a key pipeline taking exports to the Red Sea after attacks by Iran-backed militias in Iraq.
The price shock has reverberated through global markets for crude and refined products, with ultra-low sulphur diesel hitting a record $221 a barrel in New York this week, according to pricing agency Argus.
“Even if the East-West pipeline is fixed quickly in the next two months, the Red Sea is now a hot war zone,” said Michael Every, an analyst at Rabobank. “Those flows are not coming back in full.”
Shanghai futures typically trade close to those for Brent crude, the international oil benchmark, which was trading around $108 a barrel on Wednesday, and rarely rise to a substantial premium.
Most Gulf oil usually flows east through the Strait of Hormuz to China and other Asian markets. When the strait was largely closed by the war, Saudi Arabia began diverting flows through its East-West pipeline, which runs from the Gulf across the Arabian Peninsula to the Red Sea.
But Iran-backed militants in Iraq attacked the Saudi pipeline at the end of last week, while Iran-backed Houthi rebels in Yemen advanced on the Bab al-Mandab Strait between the Red Sea and the Indian Ocean, sending prices soaring in China and around the world and heightening fears over global crude supplies.
Refiners and others have been left chasing oil for immediate delivery, driving the spot price for Brent crude to $146 a barrel on Wednesday, a jump of $25 a barrel from the end of last week. Saudi Arabia has told some European refiners that cargoes due to load this month have been cancelled or delayed, according to Argus, and there are warnings that the kingdom could run out of crude exports within days.
Global crude markets are tightening at what analysts at Energy Aspects described this week as an “eye-watering pace”, as buyers rush to make up for curtailed Saudi supplies. The consultancy said the market was short of about 5mn barrels a day of crude and refined fuels and that it expected prices to spiral upwards.
For much of this year, China has sought to cushion the impact of the war by cutting imports, drawing down stockpiles and raising retail prices to curtail demand. Its actions have helped shield countries around the world from even higher crude prices.
But now China was “coming back off its crash diet”, said Bob McNally, founder of Rapidan Energy Group. He said China’s return to buying oil on the open market, the closure of the Saudi pipeline and the lack of a quick resolution to the war had combined to spark the surge in crude prices.
Chinese crude imports tumbled from more than 12mn barrels a day before the war to as little as 7.1mn b/d in June, before picking up to 8.9mn b/d in August. Current analyst forecasts put imports at about 9mn b/d in September.
Guy Wolf, global head of market analytics at Marex, said that with Shanghai futures heavily dependent on Middle Eastern crudes, China’s defences against rising prices were increasingly at risk.
“The reality is that the longer this goes on, the lower any physical inventory buffers are getting,” he said.
As state refineries have cut back their imports of crude, China’s independent refineries, the main importers of crude from Iran, have recently taken on a bigger role. But they have also faced mounting supply issues after the US naval blockade in the Gulf severely curtailed flows.
As a result, China’s stocks of petrol, diesel and jet fuel are falling, prompting speculation that Beijing may reimpose a ban on fuel exports. The country is one of the world’s largest producers of refined fuels, and an export ban early in the war rattled trading partners and sent global prices surging.
“Diesel remains the fuel most exposed to shortages,” said Karim Fawaz at S&P Global Energy. “The slightest supply disturbance may move the market from acute tightness to outright distress.”
Ye Lin, an Asia oil market analyst at Rystad Energy, said that while refinery output in China had been set to rise due to seasonal factors, Beijing would now be considering how to balance its priority of economic security with the financial pressures building on state oil companies.
“We have a whole new situation now,” she added.
Hu Min Min, lead analyst for China crude oil, fuels and refining at S&P Global Energy, said China’s stocks of refined products had “been dropping very fast in the past two months”.
“We believe [state-owned] refiners will try their best to secure cargoes. If not, we will see a reduction in exports as well as some higher inventory draw,” she said.
While China’s reserves have helped sustain supplies during the war, there is little public information about the level of stockpiles or Beijing’s willingness to allow state companies to tap them.
US energy secretary Chris Wright has sought to play down the disruption caused by the closure of the Saudi pipeline.
“This will be a brief and temporary interruption,” he told CNBC on Tuesday. “It will be measured in days.”
Saudi Aramco has not said how long it will take to repair and reopen the pipeline, but many analysts forecast it could be offline for up to a month.
