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Welcome to Dispatch Energy! Crude oil prices remain below $100 a barrel despite the near-constant closure of the Strait of Hormuz for more than five months. Much of the initial alarm about what such a prolonged closure would mean for global oil prices has simply yet to be realized. Yes, pump prices are still very high thanks to a parallel crisis in refining capacity, as I explored in my last installment of this newsletter. But even including current record-setting refining margins, pump prices are still below where they stood from March to April, much lower than we would expect this long into such an acute supply shock.
Why? A massive reduction in crude oil imports by China, which I’ve dubbed the “Beijing Swing,” has blunted crisis prices. China cut seaborne crude oil imports by 5.4 million barrels per day from prewar levels through June, covering the lion’s share of the unmitigated loss of oil supply stemming from the closure of the Strait of Hormuz. This is a truly staggering volume at more than 40 percent of China’s total prewar imports and roughly equivalent to India’s total petroleum demand. The cutback brought Chinese crude imports to their lowest level since 2015 and reduced seaborne crude oil import demand by more than the collective volume of all International Energy Agency-member state strategic petroleum releases.
How China pulled off this reduction remains hotly debated—as does the impetus behind these actions.
The Beijing Swing has been the most important—and broadly unexpected—offset in this crisis. This import pullback initially appeared unremarkable: The early collapse was expected given that China, like the rest of Asia, sources the lion’s share of its crude oil imports from the Middle East. Then, while the rest of Asia’s crude oil imports bottomed out in April to May and recovered through June, China’s imports just kept falling. It was that lack of Chinese competition for increasingly scarce seaborne barrels, combined with the massive release of global strategic petroleum stocks, that facilitated a recovery across Asia. Beijing even cut its seaborne imports of Russian crude from prewar levels, despite the fact that Russian crude oil exports were not only unaffected by the Hormuz shock but have actually risen through the war.
One of the biggest challenges in tracking this shift is that Chinese data is opaque and incomplete; unlike most other major consuming nations, China doesn’t publish official monthly consumption data or any data on stockpiles of crude or refined products—neither commercial nor strategic stocks. As such, we’re left to infer “apparent” demand estimates based on officially reported refined product output (gasoline, diesel, etc.) plus net imports. These apparent demand estimates, which are overwhelmingly driven by domestic refining activity, have fallen at the fastest pace on record.
Broadly, there are two destinations for crude oil in China: refineries, to be transformed into finished consumer products (or petrochemical intermediates), or storage, in China’s burgeoning commercial and strategic stockpiles. Decreased Chinese refining activity explains roughly half of the import cut. Official data from the Chinese National Bureau of Statistics indicate that the country’s refining runs (i.e., the volume of crude oil run through a refinery) fell by 2.7 million daily barrels from prewar levels through June. This represented the steepest contraction in runs on record, surpassing even the depths of COVID-zero in 2022.
The other half of China’s import reduction comes down to its commercial and strategic stockpiles. The critical context here is that China has a truly gargantuan volume of oil in storage and publishes virtually no official data. Estimates of the total volume of crude, derived from satellite imagery, vary but sit around 1.2 billion barrels. The country was actually voraciously stockpiling oil immediately prior to the Iran war amid surplus supply and weakening pricing, providing a key support to an otherwise flagging oil market as I explored in my very first Dispatch Energy contribution.
One of the challenges in parsing this issue is pinning down China’s prewar stockpiles. Estimates based on official Chinese data—domestic crude production, plus net imports and minus refinery runs—indicate that Beijing was stashing 1.7 million barrels per day, on average, in the three months before the closure of the Strait of Hormuz. The challenge is that this estimate is both higher than plausible and very negative for future demand expectations given that those barrels were by definition surplus to China’s prewar needs. Indeed, this estimate implies that, since 2017, Chinese crude inventories have added nearly 3 billion barrels, well above third-party estimates of total Chinese inventories and far larger than the roughly 450 million-barrel assessment using satellite imagery.
Meanwhile, third-party estimates put China’s prewar stockbuilding pace at a far more modest (but still impressive) pace of around 550,000 barrels per day. The challenge here is that this figure leaves a far larger chunk of China’s import reductions unexplained. The unexplained import reduction likely comes down to either 1) larger refining run cuts than official data reflect or 2) larger crude stock draws through June than implied by third-party inventory estimates—possibly due to a release of underground strategic reserves undetectable by satellite inference.
So what’s going on in China’s refined products market? Chinese petroleum product demand is second only to that of the United States and, for much of the past two decades, has made up a material share of global demand growth. On one hand, the collapse in refining runs could reflect the collapse in refining margins. China limited the degree to which domestic pump prices could rise in an effort to blunt the worst of the Hormuz crisis price spike: The country’s guided diesel price (an effective price ceiling) rose roughly 36 percent at its peak compared with a more than doubling of global wholesale prices. The combination of modest domestic product prices and the surging cost of imported crude meant that refining margins collapsed.
China is somehow managing with notably less fuel coursing through its economy, and explanations as to why vary widely. Export bans on refined products like diesel and jet fuel in the opening weeks of the Hormuz crisis can explain roughly 10 percent of the reduction in refining runs—a policy decision that, as discussed last month, has further exacerbated the refining capacity crisis that is keeping pump prices high. Another 10 percent can be explained by reductions in petrochemical output—typically fueled by petroleum products like naphtha or liquefied petroleum gas (i.e., propane)—or substituting natural gas or even coal-derived alternatives for those feedstocks.
Chinese electric vehicle (EV) sales have dominated headlines over recent years but cannot explain an abrupt, nearly 20 percent contraction from prewar levels. While more than half of all new vehicles sold in China are either fully or partially electric, internal combustion engines still vastly outnumber electric upstarts roughly 9-to-1 in the overall vehicle fleet. Still, exploding EV sales in China have undoubtedly weakened Chinese demand growth, and the growth in total EV charging volume is on pace to displace more than 300,000 daily barrels of Chinese gasoline demand this year, according to estimates based on vehicle charging data from the China Charging Alliance. But importantly, this was a preexisting trend rather than a sudden response to the Hormuz crisis.
Similarly, the decline in apparent diesel consumption, also by about 20 percent, can’t be sufficiently explained by observable industrial activity. While some demand weakness can be explained by the prolonged slump in China’s property market and the construction activity that underpins it, this is a yearslong decline rather than a sharp rout. Chinese truck transit data and in-city congestion measures from companies like Baidu—a Chinese technology giant that operates China’s equivalent of Google Maps—show no sudden sharp decline in mobility. Moreover, due to the aforementioned price regulations, Chinese fuel prices have risen through the crisis but nowhere near the levels experienced in the broader market or across U.S. pumps—hardly the stuff of acute price-driven demand destruction.
China could be releasing strategic or otherwise unobservable stockpiles to fill its supply gap. It’s important to stress that there is no evidence that China is releasing strategic stocks of gasoline or diesel; we lack both official data and satellite-based estimates given that most product inventory tanks do not have the floating roof that makes most aerial imagery analysis possible. That said, analysts have long suspected that, in addition to building out strategic stockpiles of crude oil, Beijing has stashed refined products, like gasoline and diesel, to further bolster the country’s energy security blanket. It is possible that China may be drawing down refined product stockpiles to soften the loss of fresh refinery output. This strategy may also extend to petrochemicals: Official Chinese production data shows the output of primary plastics (intermediate precursors) falling faster than the output of plastic products (end consumption).
Either way, unobservable Chinese stockpiles are creating great uncertainty for the global oil market. In the short term, China’s current import cut is inherently unsustainable if unobservable product stocks are being aggressively drawn down to stabilize the domestic economy. In the long term, actual Chinese refined product demand may be lower than expected if what looked like consumption from late 2025 to early 2026 was actually stockpile-building. All we can do is wait for China’s crude-buying behavior over the coming months to reveal a fuller picture of the true state of the country’s opaque domestic stockpiles.
It’s safe to say that China is acting in its own best interest. The most straightforward explanation is that China needs external markets to buy its exports, demand for which would be harmed by a Hormuz-driven recession. Beijing has been attempting to diversify away from the U.S. market amid the off-again-on-again trade war, and the two most obvious large economic blocs to turn to are Asia and Europe. Unfortunately, those two regions were also especially exposed to the Hormuz shock given their extensive dependence on energy trade with the Middle East, meaning that a fuel-price-driven recession would have come at the worst possible time for Beijing’s export ambitions.
But there are countless theories bouncing around among analysts, with more nefarious options including some kind of deal between Xi and Trump or an attempt by Xi to temporarily soften the economic impact in the U.S. only to yank the carpet out from under Trump and hike imports ahead of the midterm elections. While those more tinfoil-hat theories are unlikely, the fact that China could use this immensely powerful energy weapon in ways more harmful to the West should begin sounding alarms for Washington and its allies.
The Beijing Swing has benefited Western consumers—so far. China has demonstrated an ability to swing global oil balances by roughly the same amount as the entire collective OPEC+ producer group. Yet, the U.S. has an uncomfortable history with OPEC+, an organization that often determines production by policy rather than by market signals. It is no doubt concerning that similar market power has now been demonstrated, on the demand side, by Washington’s primary geopolitical rival.
Policy Watch
- The Iran war continues to smolder on, with traffic through the Strait of Hormuz down considerably from the recent highs that followed the signing of the U.S.-Iran memorandum of understanding (MOU) in June. The volume of oil flowing through the waterway rose to a steady 10-day average pace of more than 15 million daily barrels by early July as long-stranded ships raced for the exit en masse, according to tanker tracking data from Kpler. But even after the MOU was finalized, Washington and Tehran disagreed about the details concerning control of traffic transiting Hormuz. This discrepancy eventually led to a resumption of tit-for-tat attacks between the U.S. and Iran, as well as Iranian attacks on regional shipping. Today, the 10-day average pace has waned to around 5.5 million daily barrels, a quarter of the prewar level, and there’s no sign of the security conditions in Hormuz changing anytime soon.
- In late July, the Iranian-backed Houthis in Yemen announced a maritime blockade against Saudi Arabian ships in the Red Sea in response to a breakdown in a yearslong ceasefire between the militant group and Riyadh. While such a blockade would always complicate the substantial flow of oil through the Red Sea, it’s especially concerning in the current context. The Saudi East-West pipeline was the single largest rerouting path for oil normally shipped out of the Strait of Hormuz, but the pipeline’s supporting infrastructure has now come under fire amid Houthi efforts to target oil facilities across the country. Saudi Arabia regularly exported fewer than 2 million daily barrels out of its Red Sea ports and, amid the war, that volume has climbed to more than 5 million barrels a day. The Houthi blockade has had two large effects on Saudi shipping. First, the blockade has pushed most Saudi tankers to operate dark by turning off their transponders, which makes it harder for the Houthis (and analysts) to track Saudi oil exports. Second, the blockade has forced more Saudi barrels north, through the Suez Canal and the parallel Suez-Mediterranean pipeline. Furthermore, the conflict has spread beyond waterways to attacks on Saudi oil assets, from the Jazan oil refinery to the massive oil processing facility at Abqaiq—the world’s largest, capable of processing a staggering 7 percent of the world’s oil supplies, and located at the beginning of the critical East-West pipeline.
Innovation Spotlight
- Oil trading is beginning to break free of its traditional work-week strictures, with a growing number of efforts to launch oil derivative contracts that trade 24/7. Traditional West Texas Intermediate and Brent crude futures contracts traded on the New York Mercantile Exchange and the Intercontinental Exchange trade between Monday and Friday, providing the market breathing room over the weekend to process new information. Given that so much of the Iran war has been conducted in short bursts of weekend fighting, however, there has been a burst of demand for alternative ways to trade oil prices over the weekend, especially on cryptocurrency platforms like HyperLiquid.
Further Reading
- This week, the U.S. Department of Energy reported that the volume of crude oil stored in the U.S. Strategic Petroleum Reserve (SPR) fell below 300 million barrels for the first time since the SPR was originally filled nearly a half-century ago. With SPR stocks so low, there is growing debate about how much further the SPR can actually be drawn down amid concerns about the statutory and physical limits of the U.S.-controlled caverns that make up the reserve. But I believe that there is considerably more room to draw down the SPR, a position laid out well and in far greater detail by Arnab Datta in Bloomberg’s Odd Lots newsletter.