China's Secret Oil Reserve Drawdown Keeps Prices in Check

The war between Iran and the US-backed coalition has been ongoing for six months, but oil prices have not skyrocketed to record highs as predicted. Prior to the conflict, about 20% of the global oil supply transited through the Strait of Hormuz, leading many analysts to warn that a closure would push oil prices to $150 or even $200 per barrel.

Rory Johnston, an oil markets analyst, points out that China's massive import cuts have contributed to the lower-than-expected price hike. China reduced its crude oil imports by over five million barrels a day, roughly 45% of their total pre-war import appetite. This reduction can be explained in part by a decrease in refining runs and a drawdown of strategic reserves.

Johnston notes that some of the remaining reduction may be due to China halting its prior pace of stockpile building. If this is the case, it would mean Beijing does not need to replace those volumes anytime soon, which is a bearish outcome for oil prices. However, if they are aggressively drawing down less visible strategic stocks, it means they will eventually need to replace them.

The US and other partners have also released strategic petroleum reserves to blunt the effects of the conflict. This release has added over 3 million barrels a day of incremental supply to the market, helping to keep prices in check. The US SPR has dipped under 300 million barrels, but Johnston believes there is still room for further drawdown before reaching physical limits.