Chinese Oil Prices Hit Record Highs as Beijing’s Supply Cushion Fades

Chinese oil prices have jumped to record highs as refiners in the world’s largest crude importer intensify their hunt for supplies amid widening fears over the security of Middle East exports. Shanghai oil futures were trading at $129 a barrel on Wednesday, surpassing their previous peak of $121.80 set in the opening weeks of the Iran war and marking a 14 percent climb since the end of last week, when Saudi Arabia was forced to shut a key pipeline carrying exports to the Red Sea after attacks by Iran-backed militias in Iraq. The shock has rippled through global markets for crude and refined products, with ultra-low sulphur diesel hitting a record $221 a barrel in New York this week, according to pricing agency Argus.

The episode marks a sharp reversal for a market that had grown accustomed to Beijing’s stabilizing hand. For much of this year, China cushioned the global impact of the war by cutting imports, drawing down its stockpiles, and raising retail prices to curb domestic demand. Those actions helped shield countries around the world from even higher crude prices. But that buffer is now gone. Chinese crude imports tumbled from more than 12 million barrels a day before the war to as little as 7.1 million barrels a day in June, before recovering to 8.9 million barrels a day in August. Now, with stockpiles depleted, China is returning to the open market at the worst possible moment.

The mechanics of the supply disruption are straightforward but unforgiving. Most Gulf oil flows 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 flows through its East-West pipeline, which runs from the Gulf across the Arabian Peninsula to the Red Sea. But Iran-backed militants in Iraq attacked that 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 result has been a scramble for prompt cargoes, driving the spot price for Brent crude to $146 a barrel on Wednesday, a jump of $25 a barrel from the end of last week. Saudi Arabia has told some European refiners that cargoes due to load this month have been cancelled or delayed, according to Argus, and there are warnings that the kingdom could run out of crude exports within days.

The market’s fragility is evident in the unusual premium for Shanghai futures over Brent, the international benchmark, which was trading around $108 a barrel on Wednesday. Shanghai futures typically trade in line with Brent and rarely command a substantial premium. That gap reflects the physical reality that Chinese buyers are competing for every available barrel. Analysts at Energy Aspects described the pace of tightening in global markets as “eye-watering,” estimating the market is short about 5 million barrels a day of crude and refined fuels and expecting prices to spiral upwards.

The question now is whether Beijing can resume its role as a shock absorber or whether it will be forced to become a competitor for scarce supply. Bob McNally, founder of Rapidan Energy Group, put it bluntly: China was “coming back off its crash diet.” Its return to buying oil on the open market, combined with the closure of the Saudi pipeline and the lack of a quick resolution to the war, has sparked the surge in crude prices. As Michael Every of Rabobank noted, even if the East-West pipeline is fixed quickly, “the Red Sea is now a hot war zone. Those flows are not coming back in full.” For a global economy already wrestling with inflation and slowing growth, the prospect of sustained supply disruption from the Middle East, with China back in the market as a buyer of last resort, points to a period of structurally higher energy costs. The cushion Beijing provided is spent, and the market is now exposed to the full force of the conflict.