China has begun drawing on its commercial crude oil reserves to contain the supply shock caused by the war in Iran, although the world's largest oil importer continues to prioritize cutting refinery runs and imposing restrictions on fuel exports to deal with the fallout from the crisis.
The average drawdown from inventories is expected to be around 1 million barrels per day over the coming months, according to estimates by Vortexa, Kpler and Energy Aspects.
This represents about a third of the crude oil that China has not been receiving since the conflict led to the near-total closure of the Strait of Hormuz, but it remains small compared to the approximately 1.2 billion barrels that the country holds in its commercial and strategic reserves.
The biggest shock in the history of the oil market
The price reaction to what the International Energy Agency described as the biggest shock in the history of the oil market has been relatively limited, as China has refrained from entering global markets to compensate for the lost quantities.
Brent crude, the global benchmark for oil prices, has risen by less than a third since the conflict began, while analysts estimate that China's imports may remain weak in the coming months, helping to ease pressure on prices.
China increased its oil reserves to unprecedented levels last year. It began drawing on those reserves in May, consuming nearly 25 million barrels during the month ending June 7, according to Energy Aspects, based on data from its satellite tracking unit, Kearus.
Despite the enormity of this figure – compared to global consumption of 100 million barrels per day – the decline in demand in the refining sector had the greatest impact.
Chinese refinery procedures
State-run refineries have cut refining rates to record lows, restricting fuel exports under wartime conditions to ensure domestic supplies, amid the accelerating shift towards electric vehicles.
Emma Li, senior China market analyst at Vortexa, said: “China’s transportation system has become structurally more resilient compared to previous oil shock periods.”
She added that the rapid expansion in the use of electric vehicles has contributed to a reduction in fuel demand of approximately one million barrels per day during the current quarter. Some observers believe that the current decline in demand may not be permanent.
US administration assessment of China's withdrawal
U.S. Energy Secretary Chris Wright said in Washington on Tuesday that China had been building up a strategic petroleum reserve, but has now stopped increasing those stockpiles and begun drawing down reserves. He added that China has also reduced refinery operating rates, leading to a decline in refined product production. Wright stated that this is a crisis response and does not reflect a permanent structural shift.
China's strategic reserves are shrouded in secrecy; the existence of long-term objectives and the heavy reliance on underground storage prevent a clear picture of their actual size. Therefore, market participants rely on satellite imagery and independent estimates to fill the information gap.
While Beijing continued to bolster its strategic oil reserves during the war, refineries increasingly relied on commercial stockpiles rather than new imports, according to analytics firm Kpler. The volume of crude oil drawn from government reserves remains unclear due to a lack of transparency.
The possibility of China using part of its strategic reserve
Sumit Ritulia, senior analyst for refining supply and modeling at Kpler, said that the use of part of the strategic petroleum reserve could not be completely ruled out, adding that some of the reserves in underground storage facilities, which are difficult to monitor, may have been used to refill the more visible storage facilities that supplied the market with oil.
Jiannan Sun, an analyst at London-based Energy Aspects, said that Chinese state-owned refineries are expected to resume buying from global markets once they begin to draw substantially from reserves.
He added: Resuming large-scale purchases is contingent on obtaining government approval, which depends on Beijing's interpretation of developments in the Strait of Hormuz.
