Where will oil prices go next? The biggest uncertainty is China!

Global energy markets are at a critical and uncertain moment. Ongoing tensions between the US and Iran continue to disrupt tanker traffic through the Strait of Hormuz, but the ultimate direction of oil prices may not depend entirely on the firepower in the Persian Gulf—it may depend on China’s purchasing decisions.

China sharply reduced oil imports this spring, with the decline nearly one-third. This move objectively suppressed the upward momentum in oil prices at the beginning of the war. According to the latest media analysis, the market’s most core question has now shifted to: when will China return to the market and resume large-scale purchasing?

The answer to this question will directly determine the direction of oil prices. Karen Young, a senior research scholar at the Center on Global Energy Policy at Columbia University, said, "The direction of China’s demand is the most critical piece of the whole puzzle." Meanwhile, on Monday, Trump announced the reimposition of a maritime blockade on Iranian ports and claimed that the US would become the "guardian of the Strait of Hormuz." Geopolitical variables are further piling on, and market uncertainty continues to heat up.

China’s import cuts, unexpectedly becoming an “oil price stabilizer”

In this spring, China’s oil import volume dropped by nearly one-third compared with a year earlier. According to China’s May customs data, the scale of this decline caught the market off guard. It was this demand contraction that effectively prevented oil prices from surging further in the early phase of the outbreak of war.

China is widely believed to hold the world’s largest oil reserves, but analysts using satellite monitoring of above-ground storage tanks indicate that China has not drawn down these visible stocks in large quantities. At the same time, during the US-Iran conflict, the processing volume of China’s refineries declined somewhat, but these factors still cannot fully explain the sharp drop in import volumes.

Analysts point out that China also has other resources that can be reallocated: abundant coal resources can replace oil for chemical production; renewable energy accounts for a larger share of electricity supply; China is the world’s largest electric vehicle market; and in addition, the world’s largest high-speed rail network structurally reduces demand for oil. The International Energy Agency (IEA) said this year is likely to mark the first significant decline in China’s oil consumption since the oil crises of the 1970s and early 1980s.

When China returns to the market is the biggest variable

There are already signs that China’s oil imports may be about to rebound. Citing information from the IEA, there has recently been evidence of procurement activity and one-off tanker deliveries, suggesting that "China’s buying interest has begun to return."

But the market generally believes China is not facing immediate pressure to restock. Ben Cahill, a senior research fellow at the Atlantic Council, said, they currently have absolutely no urgent pressure. China’s massive strategic reserves provide ample buffer room, allowing it to stand pat for a fairly long time.

This means the timing and pace of China’s return to the market will largely determine the next step for oil prices. If China continues to wait on the sidelines, the pattern of downward pressure on oil prices will persist; once China resumes large-scale purchasing, oil prices will rise under unchanged other conditions. Gregory Brew, an analyst at Eurasia Group, said, "China actually has stronger market pricing power than any country on Earth, including Saudi Arabia and the United States."

Geopolitics and supply-side risks still cannot be ignored

Although China’s demand is the biggest variable right now, supply-side disruptions also cannot be underestimated. On Monday, Trump announced the reimposition of a maritime blockade on Iranian ports, aiming to cut off the channel through which Iranian oil flows into global markets, and claimed on social media that the US will serve as the "guardian of the Strait of Hormuz," seeking to impose a 20% "service fee" on all transiting cargoes. However, whether the US has a clear legal basis to levy such fees remains unclear.

Another layer of pressure stemming from the Russia-Ukraine war is also worth noting. Last week, Russia announced a ban on diesel exports to safeguard domestic supply, and combined with the ongoing strikes by Ukrainian drones on Russia’s refinery facilities, wholesale diesel prices then jumped sharply. According to AAA data, as of Monday, the US retail diesel average is $4.88 per gallon, up 2.5% from a week earlier.

Taken together, with oil still flowing out of the Persian Gulf, output rising in other oil-producing countries, and China’s demand staying weak, global oil supply currently basically meets demand, and oil prices are only about 7% higher than before the war. However, the issue of damaged refining capacity remains prominent—whether due to destruction of infrastructure in the Persian Gulf or damage to Russian refineries, global refining throughput remains below normal levels. This is also an important reason why end-consumer fuel costs are still higher than before the war. Richard Goldberg, a senior adviser to the former Trump administration’s National Energy Policy Commission, said, "We are at a critical moment, and it’s still hard to judge how the situation will evolve."

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