Oil prices in China have surged to record highs as refiners in the world’s biggest crude importer intensify their search for supplies amid growing fears over the security of exports from the Middle East.
Oil futures in Shanghai were trading at $129 a barrel on Wednesday, surpassing their previous peak of $121.80 during the first weeks of the Iran war. The price has risen 14 per cent since the end of last week, when Saudi Arabia was forced to shut a key pipeline carrying exports to the Red Sea following attacks by Iran-backed militias in Iraq.
The disruption has reverberated across global markets for crude and refined products. Ultra-low sulphur diesel reached a record $221 a barrel in New York this week, according to pricing agency Argus. “Even if the East-West pipeline is fixed quickly in the next two months, the Red Sea is now a hot war zone,” said Michael Every, an analyst at Rabobank. “Those flows are not coming back in full.”
Shanghai futures normally trade close to Brent crude, the international oil benchmark. Brent was trading at around $108 a barrel on Wednesday, making the substantial premium commanded by Shanghai futures particularly notable. Most Gulf oil normally travels east through the Strait of Hormuz to China and other Asian markets. When the strait was largely closed by the war, Saudi Arabia began diverting supplies through its East-West pipeline, which runs across the Arabian Peninsula from the Gulf to the Red Sea.
That alternative route has now come under pressure. Iran-backed militants in Iraq attacked the Saudi pipeline at the end of last week, while Iran-backed Houthi rebels in Yemen advanced on the Bab al-Mandab Strait between the Red Sea and the Indian Ocean. The developments have sent oil prices higher in China and elsewhere while intensifying concerns over the availability of global crude supplies.
Refiners and other buyers have been scrambling for oil for immediate delivery, pushing the spot price of Brent crude to $146 a barrel on Wednesday, $25 higher than at the end of last week. Saudi Arabia has told some European refiners that cargoes scheduled to load this month have been cancelled or delayed, according to Argus, while warnings have emerged that the kingdom could run out of crude exports within days.
Global crude markets are tightening at what Energy Aspects described this week as an “eye-watering pace”. The consultancy estimated that the market was short of about 5mn barrels a day of crude and refined fuels and expected prices to spiral upwards as buyers attempted to compensate for curtailed Saudi supplies.
China had previously sought to cushion the impact of the war by reducing imports, drawing down stockpiles and increasing retail prices to restrain demand. Those measures helped limit the impact of higher crude prices on countries around the world. But Bob McNally, founder of Rapidan Energy Group, said China was now “coming back off its crash diet”, with renewed purchases on the open market coinciding with the Saudi pipeline closure and the absence of a rapid resolution to the war.
Chinese crude imports fell from more than 12mn barrels a day before the war to as little as 7.1mn b/d in June, before recovering to 8.9mn b/d in August. Current analyst forecasts put September imports at about 9mn b/d.
The pressure is also spreading to China’s refined-fuel market. Independent refineries, which are the main importers of crude from Iran, have assumed a larger role as state refineries reduced imports, but they too have faced mounting supply problems following a US naval blockade in the Gulf. Stocks of petrol, diesel and jet fuel are consequently falling, prompting speculation that Beijing could again ban fuel exports.
“Diesel remains the fuel most exposed to shortages,” said Karim Fawaz at S&P Global Energy. “The slightest supply disturbance may move the market from acute tightness to outright distress.”
Ye Lin, an Asia oil market analyst at Rystad Energy, said Beijing would now be considering how to balance economic security with mounting financial pressures on state oil companies. Hu Min Min of S&P Global Energy said refined-product stocks had “been dropping very fast in the past two months”, adding that state-owned refiners would try to secure cargoes and could reduce exports while drawing further on inventories.
China’s reserves have helped sustain supplies during the war, but little public information is available about the level of its stockpiles or Beijing’s willingness to allow state companies to use them. US energy secretary Chris Wright sought to downplay the disruption, saying on CNBC that the closure would be “a brief and temporary interruption” measured in days. Saudi Aramco has not said when the pipeline will reopen, although many analysts expect it could remain offline for up to a month.
