China, wary of global unrest, is keeping the oil market afloat

The U.S. incursion into Venezuela and Trump’s declaration that the U.S. now runs the country and its oil highlight the complicated relationship between the U.S.—the world’s largest oil producer—and China, the biggest importer.

Oil prices have fallen during the past three years, and may continue to do so if there is no political disruption to supplies. The oil market is oversupplied by as much as 500,000 barrels to well over two million barrels a day this year, depending on who you ask.

But the one thing analysts agree on is that China has been an opportunistic buyer. It has been a major force keeping prices from cratering.

The Chinese buy when prices are low because “they know they are vulnerable" said John Kilduff, partner with Again Capital. China needs to import oil to meet its needs.

“They just put it in storage and hold onto it," he said.

China has strategic reserves, much like the U.S. stockpile, which can help with supply disruptions and tensions with the U.S., including Beijing’s ambitions to control Taiwan.

Traders are currently watching protests in Iran and a U.S. threat to intervene in case that unrest should disrupt Iran’s oil exports.

China’s purchases last year prevented a price collapse. U.S. oil production hit record levels, while OPEC+ returned oil to the market.

China bought extra barrels as prices weakened.

“China is why oil isn’t $40 and why it’s now around $60 again because those inventories will continue increasing," said Bart Melek, global head of commodities research at TD Securities.

West Texas Intermediate futures were just above $61 Tueday.

Energy stocks have performed relatively well despite the 20% fall in oil prices over the past year. The S&P energy sector is still up about 4%.

China imports 75% of the oil it uses. Russia has been its single biggest source of supply, via pipeline and tanker, providing about 20%. Iran provided about 12%, according to Kpler. Both sources are under U.S. and European sanctions.

China has been the biggest buyer of Venezuela crude. But at 500,000 barrels those imports are a small fraction of China’s needs. China can refine upwards of 14 million barrels a day.

China put an average 900,000 barrels a day into its strategic reserves for most of last year, Kilduff said.

“Given the fraught world right now, I don’t think there’s anything to indicate that they’re going to slow these purchases," said Helima Croft, head of global commodities strategy at RBC.

“This has been the big debate in the market over China," said Croft. She said those who are more optimistic on oil prices believe China has more physical storage capacity to put oil into its strategic reserves, and it will continue to do so because it worries about supply disruption, including from a potential conflict with the U.S.

The Trump administration’s recent seizure of sanctioned, sometimes stateless oil tankers connected to Venezuela put a spotlight on the dark side of the market. According to Kpler, about 17 million barrels of oil are sitting in tankers now around Venezuela and a similar amount are sitting off of China and Malaysia. Many of those are sanctioned barrels from Iran and Venezuela.

“There has been Venezuelan crude building up off of China for a good many months now. There’s Iranian crude as well," said Matt Smith, a Kpler analyst. “It appears that the Chinese are neglecting sanctioned barrels and buying other crude in the market." That forces down prices of sanctioned oil.

Ed Morse, global commodities strategist and senior advisor at Hartree Partners, asid in the last two months, Chinese purchases for its strategic reserve have been lower.

“The Chinese government didn’t want to cross Trump," he said. state-owned companies have avoided sanctioned oil, leaving it to independent Chinese firms.

Morse expects China to increase purchases to one million barrels or more a day into its strategic reserves because of concerns about Trump’s actions globally. Continuing those purchases isn’t a declared policy. The Chinese “have made no public statement" about their intentions, he said.

China doesn’t provide details on its strategic reserves, only guidance. Morse expects there could be an indication from China on its purchases later this quarter.

“They are the swing between it being a loose market and a tight market. They are likely to keep it a tighter market," Morse said.

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