China will play a pivotal role in determining whether oil prices sustain this week’s gains and potentially test wartime highs.
of US crude oil price It topped $102 a barrel on Thursday, its highest closing price since May. The futures contract has soared about 50% from its summer low of $68.55, hit about three weeks after Washington and the Iranian government signed a now-failed memorandum of understanding on June 17.
This week’s rally comes as fighting intensifies in the Middle East, with Saudi Arabia’s vital East-West oil pipeline shut down following multiple attacks.
Bob McNally, president of Rapidan Energy, said the oil market has gradually regained a risk premium since the memorandum collapsed and the U.S. reimposed a naval blockade of Iran in July. However, U.S. crude oil prices remain well below the wartime high of $112.95 reached on April 7.
crude oil price
FactSet and CNBC report
Rebecca Babin, senior energy trader at CIBC Private Wealth, said that while markets are pricing in an escalation in the Middle East conflict, they may not be fully factoring in the rise in Chinese imports.
“What it doesn’t reflect is the fact that as refiners start to really ramp up production in China and the market tightens even more, we may actually see a stronger pull in oil demand,” Babin told CNBC’s “Squawk Box” on Friday.
Chinese crash diet
China played an important role in preventing price hikes as a swing consumer during the Iran war. McNally said the country has cut its crude oil imports from 3 million barrels a day to 5 million barrels a day. Beijing has huge and reliable oil reserves of over 1 billion barrels.
“The biggest factor holding down oil prices since this started has been China’s crash diet,” McNally said Tuesday on CNBC’s “The Exchange.” “Oil prices are starting to go up because people are off their diet, they’re thirsty, they’re hungry.”
China’s refiners have an incentive to re-enter the market, as the war between Iran and Ukraine has wiped out significant global refining capacity and the profit margins on diesel production have skyrocketed.
“Refining margins are so extreme right now that you literally can’t ignore them,” Babin said. “They’re going to buy crude oil, put the product on the market and make a profit.”
China’s crude oil purchases are not expected to return to pre-war levels, but are up from spring purchases, Amrita Sen, founder of Energy Aspects, said in an interview on CNBC’s “Access Middle East” on Friday.
China’s imports fell to a wartime low of about 6 million barrels per day in June, down nearly 50% from February’s 11.5 million barrels per day, according to Kpler data. Imports rose to about 7 million barrels per day in July and August, the data showed.
Matt Smith, director of commodity research at Kepler, said Chinese buying activity this month was at the same level as July and August, and was unlikely to increase dramatically beyond that.
Smith said the Chinese government is “a very prudent buyer and will focus on reining in inventories and refinery operations rather than buying triple-digit crude oil.”
However, as the emergency stockpile release nears its end, oil prices are on the rise. After more than six months of war, global inventories have fallen by 400 million barrels, according to the U.S. Energy Information Administration, eroding one of the other key buffers that kept oil prices from surging earlier this year.
“The summer is over, but there’s no peace. The war is still on,” Rapidan Energy’s McNally said, noting that the Trump administration’s efforts to persuade markets are less effective than in the past.
“The market’s optimism bias, its willingness to sell through verbal intervention, and its chin that peace is just around the corner seem to be waning a bit,” he said.
