Facing low commercial inventories and a severe squeeze on Iranian barrels, Chinese refiners are rapidly approaching a threshold that could force its return to the spot crude market as early as October, analysts have said.
As the world's largest crude importer, China has successfully absorbed months of severe supply bottlenecks and high prices by drawing down its commercial inventories and cutting refinery runs.
"According to a survey by China-based consultancy Oilchem, gasoline inventories fell by 140 [million tons] between late April and end-July, while diesel stocks declined by 253 mt over the same period. Both have now fallen back to levels last seen around December," Kpler analysts noted.
With commercial reserves running low and alternative spot grades facing surges in costs, Chinese refiners are rapidly approaching a threshold where they can no longer rely on stored reserves.
"They are already starting to buy spot crude in the current August trading window, which translates to more imports into China for October deliveries," said June Goh, senior crude analyst, Sparta in an email to.
While rising supply workaround volumes may ultimately place a ceiling on runaway oil price spikes, October will see a rise in imports for China, analysts said.
"China will first try to pivot to Russian alternatives, then to Saudi barrels if not routed via Sidi Kerir, then to the rest of the spot market like Iraqi, Brazilian and WAF crudes," said Goh, adding that rising spot acquisition costs and higher freight rates will inevitably narrow refinery profit margins.
Chinese energy giant Sinopec confirmed this week its plans to scale up crude sourcing from Brazil and Africa to counter ongoing supply disruptions in the Middle East.
Although alternative workarounds such as increased reliance on Russian pipeline and seaborne flows, Brazilian grades, and discounted Iraqi barrels are buffering immediate shortfalls, they carry heavy freight costs, experts noted.
Middle East crude exports are increasingly forced through nonconventional routing and ship-to-ship transfers, driving conventional freight rates sharply higher even before Chinese demand fully recovers, J.P. Morgan Securities noted.
Complicating this procurement timeline is an escalating geopolitical front.
"With the US-Iran war now in its sixth month and continuing to restrict global supplies of crude and refined products, it remains unclear how Washington can meaningfully increase the pressure on Tehran without targeting China, the main buyer of Iranian crude, and risking significant economic and geopolitical blowback," Saxo Bank analysts noted.
Responding to the mounting pressure, Chinese Foreign Ministry Spokesperson Lin Jian stated during a Monday press briefing that Beijing firmly opposes unilateral sanctions and will "do what is necessary to protect our legitimate rights and interests."
Meanwhile, Morgan Stanley analysts said in a Sunday note that China's prolonged import contraction is no longer deteriorating; instead, the convergence of drained inventories and external trade pressures raises the distinct scope for Chinese crude buying to pick up.