China's hidden reserves may be the reason why oil prices haven't exploded even higher

By Nora Redmond

Chinese crude imports fell from 11.5 million barrels per day in February to an average of less than 7 million barrels per day in May.

Many oil-market analysts at the onset of the U.S.-Iran war said the global economy would start to feel the pinch of a virtually shut Strait of Hormuz as early as May.

But as much as oil prices have risen - front-month Brent futures (BRN00) are up over 30% since the U.S. and Israel first attacked Iran - the global economy is still growing at a fairly rapid clip.

There is a high chance that the Chinese government is using its strategic supply of petroleum to bolster global markets, market researcher Rory Johnston wrote in the Commodity Context newsletter on Substack.

Oil prices were initially thought to surge higher given the now prolonged closure of the Strait of Hormuz, but a combination of demand destruction and extra supplies of oil may be preventing more significant spikes.

Indicators of China's demand for petroleum have dropped from more than a 40% decline in imports of crude oil from 11.5 million barrels per day in February to an average of below seven million barrels per day in May - the steepest reduction in refining activity in the country since its policy to combat the Covid-19 pandemic four years ago, he said. Yet, mobility indicators show little sign of an actual collapse in demand, with flights and traffic remaining at their regular levels.

"This indicates that China is likely drawing statistically invisible inventories of both crude and refined products to sustain demand," Johnston wrote. This doesn't count as "true demand destruction," but temporary relief in the supply chain, like when Japan and the U.S. released reserves from their strategic stockpiles.

So despite the transparency of global inventories of oil and their transit, much of China's industry is "troublingly opaque," he said.

"Today, this represents the largest blind spot to the market's collective statistical model of the oil industry," Johnston wrote. "And, more urgently, this leaves the market guessing as to when China's aggressive [Strategic Petroleum Reserve] support will be exhausted or otherwise withdrawn, which would prompt a renewed surge in upward pricing pressure."

-Nora Redmond

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05-26-26 0542ET