China's reduced oil imports help keep global prices steady amid Hormuz closure

JPMorgan analysts noted this week that oil prices have remained relatively calm, hovering near $94 a barrel, despite the ongoing conflict that has effectively closed the Strait of Hormuz for a fourth month. The closure, which blocks about 20% of the world’s oil trade, has been the largest energy disruption in recent history.

China’s steep decline in crude imports – from an average of 11 million barrels per day over the past five years to roughly 7.8 million barrels per day in May, the lowest level in nearly a decade – has absorbed much of the supply shock. The country’s strategic oil reserves, estimated at 1.4 billion barrels, have also contributed to market stability. According to JPMorgan, China’s import reduction accounts for about 74% of the global decline in crude trade.

Societe Generale analysts described China as the market’s “key rebalancing force.” They observed that the 14% loss in global crude supply from the Hormuz closure has lifted prices by roughly 30%, a smaller rise than the 130% surge seen during the 1973 OPEC embargo, which cut 7% of supply.

Experts caution that China’s ability to buffer prices may be limited. Michal Meidan of the Oxford Institute for Energy Studies highlighted that Chinese stakeholders have learned from a 2021 energy crisis caused by a global coal shortage and government price caps, which led to power plant shutdowns and outages. He questioned how long China can maintain low imports before tapping its strategic reserves or resuming higher-cost purchases.

Societe Generale also pointed to other factors that could temper price increases, such as continued U.S. oil exports and evidence that the Strait of Hormuz is allowing more vessel traffic than initially thought. However, analysts warned that sustained conflict would likely push prices higher.

“The market will require higher prices to restore balance,” wrote Societe Generale’s Mike Haigh. “Several structural pressures are pointing in the same direction: strategic reserves will need to be rebuilt, inventories are unlikely to remain comfortable without incremental supply, and new production requires stronger returns to move forward.”