U.S. crude oil prices have surged above $100 per barrel for the first time since May, driven by escalating conflicts in the Middle East, including attacks on Saudi Arabia’s crucial oil pipeline. The future trajectory of these prices hinges critically on China’s crude oil import decisions, which have previously been suppressed by its strategic reserves.
Analysts suggest China, incentivized by soaring diesel refining margins, is poised to increase its purchases, potentially tightening the global market further as emergency stockpiles dwindle and verbal interventions lose their effect.
U.S. crude oil prices have once again breached the $100 mark this week, a level not seen since May, as geopolitical tensions in the Persian Gulf escalate. The crucial question now is whether China's future crude oil import decisions will fuel a sustained rally from here.
On Thursday, the U.S. crude oil price closed above $102 per barrel, marking its highest point since May. This surge represents an impressive 50% recovery from its summer low of $68.55, which was observed roughly three weeks after Washington and Tehran's memorandum of understanding collapsed on June 17.
This week's price jump coincided with a sharp escalation of fighting in the Middle East, notably impacting Saudi Arabia's critical East-West oil pipeline, which was shut down following multiple attacks.
Bob McNally, president of Rapidan Energy, noted that the oil market has gradually begun to factor in a risk premium since the MOU's failure and the U.S. reimposition of its naval blockade on Iran in July. However, he pointed out that U.S. crude prices remain below their April 7 wartime closing high of $112.95.
VIDEO: Rapidan Energy's Bob McNally on why oil prices are spiking (3:49)
While current market prices reflect the heightened conflict in the Middle East, they may not yet fully account for a potential surge in Chinese crude imports, according to Rebecca Babin, senior energy trader at CIBC Private Wealth.
"What isn't reflected is the fact that we may actually see a stronger demand pull for crude as refiners start to really try to ramp up in China, tightening the market further," Babin told CNBC's "Squawk Box" on Friday.
China's Pivotal Role
China has historically played a critical role in tempering oil price increases during conflicts, acting as a swing consumer. It significantly reduced its crude imports by 3 million to 5 million barrels per day, leveraging its substantial petroleum reserves of over 1 billion barrels.
McNally highlighted that China's "crash diet" on oil imports was the most significant factor containing crude prices since the conflict began. "It's coming off the diet and it's thirsty and it's hungry — it's starting to bid crude up," he explained on CNBC's "The Exchange" Tuesday.
VIDEO: We’re starting to see China really pick up its crude oil purchases, says CIBC’s Rebecca Babin (8:54)
Chinese refiners now have a strong incentive to re-enter the market. Profit margins for producing diesel have soared due to the Iran and Ukraine wars eliminating a substantial amount of global refining capacity.
"Now that these refining margins are so extreme, they literally can't pass it up," Babin stated. "They're going to buy crude and they're going to put product on the market and make money."
Amrita Sen, founder of Energy Aspects, noted that while China's crude purchases are not expected to return to pre-war levels, they have increased compared to earlier this spring. Kpler data shows China's imports plummeted to a wartime low of approximately 6 million bpd in June, a nearly 50% drop from 11.5 million bpd in February. However, imports rebounded to around 7 million bpd in July and August.
VIDEO: Oil prices at an 'inflection point' and headed higher: Amrita Sen (5:10)
Despite this, Matt Smith, director of commodity research at Kpler, suggested that China's buying activity this month remains similar to July and August and is unlikely to dramatically increase further. He believes Beijing, a "savvy buyer," will likely rely more on its inventories and maintain controlled refinery runs rather than purchasing oil at triple-digit prices.
Nevertheless, oil prices are broadly trending higher as emergency stockpile releases are nearing their conclusion. Global inventories have decreased by 400 million barrels after over six months of conflict, depleting one of the crucial buffers that previously prevented oil prices from soaring earlier this year, according to the U.S. Energy Information Administration.
"Summer is over, peace didn't happen, the war is still going on," McNally from Rapidan Energy concluded, observing that the market's optimism and willingness to sell off based on verbal interventions about impending peace seem to be diminishing.
