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China's crude oil imports from Iran increased dynamically in
April, before the end of the sanction waivers pushed volumes to
decline sharply last month. But even if we ignore May, volumes
imported between January and April 2019 still stand around 27%
lower year-on-year. Based on this year's data, Iran is the ninth
biggest supplier of China, much lower than a year ago, when the
country was ranked seventh. We still don't expect China to
completely eliminate crude oil flows from Iran, but volumes are set
to remain quite low for long.
Meanwhile, Beijing has expressed strong opposition to
Washington's decision to end the sanction waivers. As the trade war
between the two countries deteriorates, it will not be a surprise
if China simply ignores the wishes of the US, especially if the
price differentials become even more appealing to Chinese oil
companies. However, this behaviour will not be the typical one to
observe across China, as several companies have already realised
how inconvenient it would be to continue purchasing from Iran.
Focusing on the other side of the trade, China stands to be the
last hope for Iranians under current circumstances, as the
country's economy has fallen into a deep recession as oil
production collapsed. Iran's production could find support only if
China continues buying from them, even in smaller volumes. It has
become clearer that India and the rest of the world have already
halted any trade flows from Iran, as most of the discharging
activity only took place in the first half of May.
Without a doubt, it will only be Beijing that could define the
future of Iranian crude oil exports at this point. As one of the
major drivers for global energy demand, having imported more than 9
million b/d of oil, China must face the aggressiveness of the Trump
administration. The trade war between the two countries threatens
to disrupt the current balances of crude oil trade. Any reaction by
China could reshape markets yet again. Beijing has realised though
that any conflict involving Iran would cause severe damages for
China itself. The country has been heavily relying on oil imports,
with around 41% coming from the Middle East Gulf. The region's
market share stood much higher last year above 45%. Any disruption
in the Strait of Hormuz would result in massive costs for China.
Costs that could not be easily covered during such a period, when
the country's economic growth is set to slow down.
With more than 300 million registered vehicles running on diesel
and petrol, oil is essential for China's middle class. Washington
can be more flexible as the domestic production is set to further
increase, with the country turning into a net exporter by 2020.
Energy security cannot be an issue that will ignore. Alternatives
are still available, even if supply is considered to be rather
tight. Based on its imports, the country seems to have been
focusing on boosting stocks, getting ready ahead of a future
crisis. Building relationships even with smaller producers, such as
South Sudan, has proved to be rather useful for Beijing which seems
to be ready to provide "cheap" loans to secure more energy for
long. But these long-term agreements could prove dangerous for the
rest of the global market, assuming China ties up the majority of
its needs under bilateral deals. The rest of the market could then
suffer from extreme volatility.
Posted 11 June 2019 by Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime, Trade & Supply Chain, S&P Global Market Intelligence
