China is importing record volumes of oil despite a weak economy as it takes advantage of cheap Russian crude to build stockpiles and export refined products.
The rise in oil imports to record levels this year comes against the backdrop of a faltering recovery in the world’s second-largest economy.
It shows how sanctions on Russia are reshaping global oil markets, with China getting a double benefit of cheap crude for itself and the opportunity to boost exports.
For the first half of 2023, China imported 11.4mn barrels per day of crude oil, up 11.7 per cent year on year and up 15.3 per cent compared with pre-Covid levels, according to Financial Times calculations based on customs data.
“The short answer is crude stocks have been building in China,” said Mukesh Sahdev, head of oil trading at Rystad Energy, a research group. “They’re importing for the future . . . and in advance of a potential stimulus. People are all talking about a second-half story.”
China imported 2.57mn bpd of Russian crude last month, breaking a record set in May, official data showed on Thursday.
In the first half of 2023, China imported 2.13mn bpd of oil from Russia, ahead of 1.88mn bpd from Saudi Arabia, making Russia the top crude supplier to China so far this year.
Analysts differed on the rationale underpinning the stock build, with geopolitical risk another possible explanation.
Sanctions on Russia following its full-scale invasion of Ukraine have brought energy security into sharp relief for Chinese policymakers. “China could be preparing for some geopolitical situation,” said Sahdev, “a Russian tailspin or a crisis in Taiwan.”
Michal Meidan, head of China energy research at the Oxford Institute of Energy Studies, played down the security narrative.
“There’s certainly a perception in China that the external environment is deteriorating and they’re preparing for sanctions, but that’s been the subtext for years,” said Meidan.
China’s customs data implies that Russian imports have been cheaper than those from other Opec+ countries since the war in Ukraine started.
Compared with the unit price of Saudi Arabian crude, Russian oil enjoyed a discount of $9 a barrel at the end of 2022 and $11 a barrel in June.
But analysts noted the discount on Russian oil was smaller than that on Iranian or Venezuelan products, given the growth of an opaque non-dollar-denominated trade in Russian crude.
A rotation towards Russia appears to be opportunistic, rather than a systemic change. “I don’t think China’s going to go all in on Russia,” said Meidan. “This is a short-term move away from Saudi feedstocks. The Chinese are pretty keen to keep a balance between their suppliers.”
“It’s price-driven by market realities,” Meidan added. “They have these plans and a state machinery, but then they optimise around this in a way that is very sophisticated and capitalistic. One thing that isn’t appreciated in the west is how fierce competition is between the [Chinese] majors.”
Analysts at market data provider Kpler pointed to a strong incentive for Chinese refiners to keep up production, given their margin advantage of as much as $3 a barrel over Asian rivals.
Kpler expects China’s advantage from cheap Russian feedstock will allow it to flood the market, putting pressure on Korean and Japanese producers.