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The Battle For China’s Oil Market

The Battle For China’s Oil Market

China has long been concerned about the security of its oil supply. China was a net oil exporter in the 1990s, but as the economy took off, so did its oil consumption levels. China is now the second largest oil consumer in the world, and recently overtook the U.S. as the largest oil importer in the world.

That has caused a lot of anxiety about where to source its oil.

One major way that China has tried to keep its oil import dependency in check is through demand side measures, such as fuel efficient cars. Let’s set that aside for now and just look at the supply side. Related: Historic Deal With Iran Opens Up Oil Industry

Building up its strategic petroleum reserve (SPR) has been a high priority for China in reducing its vulnerability to imports. It has a goal of filling up its reserve with 500 million barrels by 2020. By way of comparison, the U.S. SPR holds 727 million barrels. As China has moved onto the second phase of its stockpile build – filling up a 19 million barrel reserve in Qingdao – oil imports are particularly elevated, hitting 7.2 million barrels per day (mb/d) in June.

Another way that China has sought to secure import supplies is by locking up supply contracts with as many oil producing countries as possible. The vast majority of China’s imports come from the Middle East and Africa.

But China’s level of imports has continued to climb as consumption increases. In 2000, China relied on imports to meet 30 percent of its needs, but that dependency swelled to 57 percent in 2014. Although monthly figures fluctuate, China’s level of imports is at an all-time high. With another storage facility opening up later this year as part of the SPR, oil imports could continue to rise.

Several geopolitical events in recent years highlight the dangers of such a dependence. In 2011, Sudan (and what is now South Sudan) provided China with 260,000 barrels of oil per day. That number shrunk to zero the following year due to the outbreak of violence. China also lost some oil supplies from Libya after the civil war broke out there and cut off exports. Related: OPEC, Get Ready For The Second U.S. Oil Boom

Then there were the sanctions that the international community (driven by the U.S.) slapped on Iran in 2012. Before the sanctions, Iran was China’s third largest source of oil imports, providing 550,000 barrels per day in 2011, or 11 percent of China’s imports, according to the EIA. That figure dropped to 439,000 barrels per day in 2012. While that may not seem like a large drop off, it is important to remember China’s imports continued to climb over this period of time, requiring ever more sources of supply.

However, now in 2015, China is in a stronger position than it may have predicted back in 2012. There are a few reasons for this.

The historic deal with Iran once again opens up the opportunity for a flood of new supplies. In fact, China has jumped the gun – so far this year it has averaged a higher level of imports than before the sanctions regime went into place in 2012. The U.S. seems to have overlooked this fact in order to hold onto China’s support during the Iran negotiations. China is importing nearly 600,000 barrels per day from Iran so far this year. But that figure that could balloon in the coming years as Iran boosts production.

That comes at a time when Saudi Arabia is producing at record levels. Saudi Arabia increased production to 10.5 mb/d in June, and will compete with Iran for market share in China, according to the Wall Street Journal. More Saudi output needs to find a home, and China is the logical choice. Iraq too has increased exports to China as its output has increased. Chinese oil companies – CNOOC, Sinopec, and CNPC – have taken upstream positions in Iraq, contributing to a rise in oil production. Related: Top 10 Changes In U.S. Oil Sector This Year

Moreover, Russia also appears eager to supply its oil-hungry neighbor. China’s imports of Russian oil skyrocketed by 36 percent in 2014. That has the added benefit of providing China with oil through pipelines, instead of through maritime shipping lanes where the vast majority of China’s imports travel, a route that China fears could be vulnerable to disruption. In fact Russia pried away market share in China from Saudi Arabia last year. Pipeline expansions will help Russian exports to China grow in the coming years as well.

Finally, the surge in U.S. oil production has also enormously benefited China. Not only has the collapse in prices slashed China’s import bill, but the sharp reduction in U.S. import dependence has freed up a lot of oil around the world for China. That is why countries like Iraq, Iran, Saudi Arabia, and Russia are fighting for market share in China.

China is still highly dependent on oil imports to meets its energy needs and imports are likely to continue to rise. But compared to a few years ago, China’s energy security suddenly looks quite a bit stronger now that oil producing countries are competing to meet Chinese energy demand.

By Nick Cunningham of Oilprice.com

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