Price, Politics and Chinese Oil Demand

Posted on 09/24/2020 4:10 PM

After the coronavirus shut-downs, crude oil prices were buoyed in part by aggressive purchases by China. Chinese imports of crude in July surged around 140% by volume above July 2019. But that oil was purchased earlier in the year when prices had taken a sharp downturn. During the height of pandemic lockdowns, lagging demand for fuels and for crude oil itself pressured crude prices to extreme lows.


China has long been known as a buyer of opportunity, and it has been reported that Chinese refiners took advantage of the spring price dip to refill coffers. That was the crude that shipped in July. Generally, when watchers see China buying crude oil, it is taken as a signal of economic strength. But that may not necessarily be reliable in this case.


As we near the elections, motives are becoming more difficult to discern. The argument for opportunity buying based on price is a sensible one and a thought that would satisfy market watchers outside such a politically charged environment.


Since prices have rallied to a more healthy $40 per barrel (roughly), China is less likely to see financial opportunity in making purchases. It is possible that Chinese importers are anticipating a second round of shut-downs related to the ongoing pandemic, supporting ideas that prices will once again fall far enough below current levels to present another, better opportunity.


But there is also the political element and it should not be ignored. It has been said that Beijing believes President Trump will recapture the White House for a second term. That may mean an extension of trade tensions and Trump’s hard line on China. It would make sense for China to stockpile U.S. crude ahead of that potentiality.


Canary CEO Dan Eberhart noted when speaking to Forbes recently that importing crude oil at current prices may not make commercial sense for refiners in China, but, “Beijing has directed them to continue buying as the election approaches—a sign that China knows that the trade issue with Trump will only intensify if the president wins a second term.” In other words, China may look to stay in Trump’s good graces by continuing to buy U.S. crude oil right through October.


This could serve a dual purpose in that it would not only bolster Chinese supplies, but also make Trump happy. It actually feels like a win-win-win if China would continue buying. Trump, China and U.S. producers would each take the “W”. But if others are correct in believing the surge in Chinese imports were simply opportunity buys, we are due for a sharp fall in Chinese business.  


China should be viewed as a strategic opportunity buyer who is wise in the ways of world trade, and currently involved in a tenuous relationship with a volatile Trump Administration. If WTI futures hold around $40 per barrel and China decides to slow purchases through October, we will know that price considerations have won the day, and we will see China trimming imports. If business remains brisk, WTI’s $40 price tag would indicate a motive other than price. If that demand spurs a rally in futures and China buys into that rally, we will know something is up.


There is an unspoken risk when considering China’s motives from a narrow perspective. Price and politics are enough to inspire action in Beijing. But the waters of strategy run deep in matters of energy and trade, especially with China, which is steeped in secrecy and long in experience.


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