The global oil market is in a state of flux, and the future of oil prices may well depend on China's actions. As the US and Iran negotiate the reopening of the Strait of Hormuz, the world's second-largest oil consumer is poised to play a pivotal role in determining the market's direction. China's ability to cushion global oil prices by tapping into its vast reserves, limiting exports, and relying on its burgeoning electric vehicle (EV) fleet has been remarkable. This has not only helped China manage the impact of higher prices at home but has also had a significant effect on the global market.
One thing that immediately stands out is the contrast between the impact of the 1973 Arab embargo and the current situation in Iran. While the 1973 embargo led to a 134% increase in oil prices, the war in Iran has not caused a similar spike. Societe Generale analysts attribute this to China's 'invisible hand' in rebalancing the market. By curbing oil imports by about 3 million barrels per day, China has been able to significantly reduce the impact of the conflict on global supply.
China's ability to limit its oil consumption is due to a combination of factors. Before the war, China was building up its crude inventories, aided by cheap deliveries of sanctioned oil from Russia and Iran. Now, with more than 1 billion barrels of oil in commercial and strategic reserves, China has been able to tap into these reserves to keep prices stable. The government has also limited exports of refined products like diesel and gasoline, ensuring domestic supply.
China's electric vehicle boom has also played a crucial role in offsetting the country's need for fossil fuels. About one out of every two new passenger cars sold in China is now a new energy vehicle. According to International Energy Agency estimates, China's EV fleet reduced oil consumption by about 1 million barrels per day last year. This has been a wonderful release valve for the global crude market, dampening demand from consumers and refiners.
However, China's ability to mitigate the global supply shock may be limited by how much it can maintain in fuel reserves. The thing that can't be sustained forever is the stockpiles of crude, and if prices weaken, we can expect China to start stockpiling again. After months of anticipating the fallout from the worst oil crisis in history, the International Energy Agency is now warning that a reopening of the Strait of Hormuz could trigger oversupply next year.
The IEA's monthly oil report forecasts that supply growth will outstrip demand next year by 4.7 million barrels per day, as crude production in the Middle East returns to normal levels. This may provide a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves, as countries review their energy strategies and policies in response to the crisis. While global oil demand is projected to grow next year, the recent instability has bolstered interest in renewable energy, which could also chip away at crude consumption longer term.
China, the world leader in EVs, batteries, and solar, has already notched record exports of clean energy technology products in March following the start of the war in Iran. This acceleration to electrification is picking up, and it could be a great moment for global decarbonization. However, the question remains: What does China want to buy? With excess supply potentially arriving as early as next month, China's ability to absorb oversupply will be crucial in restoring balance to the market.
