China's seaborne imports of crude oil ticked up in August from July but remained nearly 40 per cent below levels before the start of the Iran conflict.
China, the world's biggest oil importer, saw seaborne arrivals of 7.14 million barrels per day (bpd) in August, from July's 6.93 million bpd, according to data compiled by commodity analysts Kpler. August's imports were 4.27 million bpd below the average of 11.41 million bpd in the three months leading up to the US and Israeli attack on Iran on February 28.
The dramatic reduction in China's seaborne crude oil imports since the start of the conflict means it is shouldering the bulk of the adjustment of lower volumes from the Middle East, with exports dropping amid constrained flows through the Strait of Hormuz.
The narrow waterway remains contested between Iran and the United States, and while there is dispute over exactly how much crude oil and refined products are getting through, it is certain that it remains well below the near 20 million bpd before the conflict began.
Asia's seaborne crude oil imports were 22.64 million bpd in August, down slightly from 23.40 million bpd in July, but 4.29 million bpd, or 16 per cent, below the average of 26.93 million bpd in the three months to the end of February.
The drop in Asia's seaborne oil imports in August is only 20,000 bpd more than the decline in China's arrivals.
While most crude oil market participants expected Beijing to cut its imports in response to the higher prices caused by the Iran conflict, the extent of the drop is surprising.
China has a history of cutting imports when prices surge, but boosting them to increase stockpiling when prices slip.
Benchmark Brent crude futures jumped 75 per cent from the start of the conflict to a four-year high of $126.41 a barrel on April 30. They moderated to $96.28 a barrel on September 4, but this remains a price level above what many Chinese refiners would be comfortable paying.
The question for the crude oil market is whether China will continue to curb its imports amid ongoing high prices, or whether its refiners will seek to secure cargoes so that they do not have to tap inventories.
There are several dynamics at work in the answer to that question.
Firstly, China's smaller independent refiners are losing access to Iranian crude as the US naval blockade ensures that no new Iranian crude leaves the Persian Gulf and the oil in tankers gets delivered and depleted. This means these refiners either have to pay more for cargoes from other suppliers, or cut processing rates.
China is buying more from Russia, another exporter under Western sanctions, but that puts it in competition with India as refiners in the South Asian nation have largely replaced constrained Middle East supplies with crude from Russia.
China's seaborne imports from Russia reached 1.68 million bpd in August, up from 1.40 million bpd in July and the most since March, according to Kpler data.
China also buys about one million bpd via pipelines from Russia.
Another factor to consider is whether China's refiners try to export more refined fuels, given the extremely high profit margins currently on offer in Asia for products such as diesel and gasoline.
Exports of light and middle distillates were 963,000 bpd in August, up from 774,000 bpd in July and above the 713,000 bpd average for the three months prior to the start of the Iran war.
The increase in August's shipments of light and middle distillates almost exactly matches the increase in crude imports. While this may just be a coincidence, it does illustrate the wider point that if China does lift product exports, it will probably have to increase crude imports as well.
Since the start of the Iran war, China's decision to slash crude imports has been a major factor in keeping oil prices from surging. But its lack of product exports in the April to June period is also a factor in keeping fuel prices elevated in Asia.
Given the risk of shortages of refined fuels in Asia, perhaps it would be better for the market if China bought more crude but also exported more fuel.
(By Clyde Russell, Editing by Kate Mayberry)