China crude imports expected to rebound as Gulf flows drop below 50%

Chinese refiners largely stepped back from crude purchases during the Iran war, drawing down roughly 41 million barrels from inventories in June alone as imports plunged more than 40% from a year earlier to 7.12 million barrels a day, the lowest since October 2016. That buying pause helped cushion one of the worst supply shocks in modern history, leaving more Gulf cargoes available for European and Asian buyers at a time when traders braced for shortages.

But that dynamic is now shifting. Lower Middle Eastern prices for July and August cargoes — Saudi Aramco cut Arab Light by a cumulative $21 a barrel across three months — are luring Chinese refiners back to the market. Beijing has also approved a large increase in July fuel exports, partially unwinding restrictions imposed in March, according to commodities data and analytics firm Kpler.

"The market's lens shifts immediately to the world's demand valve, China, for clues on where prices head next," said Naveen Das, senior crude oil analyst at Kpler.

Gulf crude and condensate exports had recovered to more than 80% of pre-conflict levels in the two weeks after the U.S.-Iran interim deal in mid-June. But fresh attacks in the Strait of Hormuz this month pushed flows back below 50% of normal levels, Goldman Sachs said. Even if tensions ease, restoring exports may take longer this time as shipping companies remain reluctant to return to key routes after recent strikes. Brent crude traded at $86.29 a barrel on Tuesday, up 1.84% on the day.

China's return to the market would remove a key cushion just as supply risks intensify. The world's top crude importer holds total oil stocks of roughly 1.9 billion barrels, enough to cover about 117 days of demand, according to Goldman Sachs. But sustained draws of around 2 million barrels a day would run against Beijing's long-term goal of maintaining strategic and commercial reserves, the bank's analysts said. The U.S. Energy Information Administration estimates China added an average of 1.1 million barrels a day to strategic reserves in 2025, pushing stockpiles to nearly 1.4 billion barrels by year-end.

Refiners Return as Gulf Prices Drop

Chinese independent refiners, known as teapots, cut operating rates during the conflict as weak refining margins and higher crude prices squeezed profitability. Refinery utilization fell to 57.72% in June, down 13.09 percentage points from a year earlier, according to Chinese consultancy Oilchem.

Now, discounted Gulf grades are drawing buyers back. Saudi Aramco's Arab Light for August loading was priced at a $1.50-per-barrel discount to the Oman-Dubai benchmark, following cuts of $4 for June, $6 for July and $11 for August. Privately owned Shenghong Petrochemical purchased roughly 12 million barrels of Iraqi, Abu Dhabi and Saudi crude for July arrival, Reuters reported.

Iranian crude has become less competitive by comparison. China's Iranian oil imports are expected to fall to about 556,000 barrels a day in July, the lowest since early 2023, with 30 million to 34.5 million barrels of Iranian crude sitting in floating storage around Southeast Asia awaiting buyers.

What a Chinese Return Means for Prices

The combination of recovering Chinese demand and constrained Gulf supplies could significantly tighten the oil market in the near term. Goldman Sachs expects Brent crude to average $80 a barrel in the fourth quarter and $75 a barrel in 2027, but warns prices could climb above $110 a barrel this year if Gulf export flows fail to rebound.

The last time Gulf exports were disrupted at this scale — during the initial weeks of the Iran conflict — Brent surged past $100 a barrel within days. A repeat scenario, compounded by fresh Chinese buying, could push prices even higher, with implications for global inflation and central bank policy.

This article is for informational purposes only and does not constitute investment advice.