China's oil stockpile helped blunt Iran war price shock ahead of Trump-Xi talks

As Xi Jinping heads to Washington, analysts say China's oil reserves and lower imports have softened the Iran war's impact on crude prices. The buffer has eased pressure on global markets, but fresh Middle East disruptions keep the outlook fragile.

In Short

• Brent crude neared USD 100, but worst spike forecasts have not hit
• China cut crude imports sharply by drawing on its huge reserves
• Electric vehicles and alternative energy use further reduced Chinese oil demand

Six months after President Donald Trump launched the war against Iran, the sharpest warnings on oil prices have not materialised, though markets remain volatile and the conflict shows no sign of ending. As Chinese President Xi Jinping prepares for a state visit to Washington next week, analysts say China’s energy strategy has played a major role in preventing a bigger global price shock.

Iran is expected to figure in the Trump-Xi talks, even as Trump faces pressure at home over high petrol prices and tries to preserve a fragile trade truce with Beijing. Analysts say China’s large oil reserves and lower imports helped ease global demand, but they also caution that the situation remains fragile as disruptions spread across the Middle East.

Rosemary Kelanic, director of the Middle East programme at Defence Priorities, said the United States had benefited indirectly from Beijing’s actions. "We’ve been free-riding off Beijing in a weird way," she said. "China’s doing it because they understand that they’re on the train that Trump is driving off a cliff. If oil prices go way up, that hurts the global economy. If it hurts the global economy, it hurts them."

Beijing spent years and billions of dollars building what is estimated to be the world’s largest oil stockpile, with the US Energy Information Administration putting China’s strategic reserve at about 1.4 billion barrels at the end of last year. Xi made energy self-reliance part of China’s latest five-year plan to protect the country from foreign supply risks.

That stockpile allowed China, the world’s second-biggest oil consumer and Iran’s top buyer, to sharply cut crude imports after the United States and Israel began bombing and Tehran effectively closed the Strait of Hormuz. China was also helped by its shift towards electric vehicles and greater use of other energy alternatives. By reducing imports, China eased global demand and softened the rise in prices for the United States, Europe and other markets.

Retired US Navy Rear Adm. Mark Montgomery, now an analyst at the Foundation for Defence of Democracies, said, "The Chinese deserve credit. They did in 10 years what took us 25 years after the 1973 oil crisis to do: really build a kind of strategic petroleum reserve that could allow you to weather this."

That resilience is facing new strain. Attacks by Iran-backed militias this month led Saudi Arabia to temporarily shut a major pipeline carrying crude across the kingdom to Red Sea ports. The Houthis in Yemen have also seized two strategic islands in the southern Red Sea, increasing their ability to disrupt a key shipping route. Planned talks among Gulf nations on reopening the Strait of Hormuz, which were due earlier this week, have been put on hold. Before meeting Xi, Trump is due to meet leaders of the Gulf Cooperation Council in New York on Tuesday on the sidelines of the UN General Assembly. The group includes Saudi Arabia, the United Arab Emirates, Qatar, Oman, Kuwait and Bahrain.

Oil market experts say the situation remains uncertain. Bank of America analysts said last week that they expected oil to average USD 83 a barrel in the second half of the year because of more persistent disruption around Hormuz, though they still expect shipping through the strait to increase gradually. They said prices could rise to USD 95 to USD 120 a barrel if violence worsens and keeps traffic restricted, while damage to major energy infrastructure could push prices as high as USD 150 a barrel. Brent crude averaged about USD 69 a barrel last year, is now near USD 100, and briefly touched USD 126 in late April.

Jonathan Czin, a former senior CIA analyst now at the Brookings Institution, said the way China has handled the volatile oil market is seen in Beijing as "a vindication of Xi’s last five-year plan and his focus on self-reliance". Even so, major differences remain between Washington and Beijing over Iran. The Trump administration has struggled to persuade China to use its economic leverage to press Tehran to end the war and reopen the Strait of Hormuz. Chinese officials, who have strongly opposed the US war, have also objected to recent US threats to raise economic pressure on countries and entities still doing business with Iran.

Analysts say China’s approach was not driven by altruism. They believe Beijing built up its stockpile partly as contingency planning for possible military action to take control of self-ruled Taiwan, which China claims as its own territory. Using those reserves now has not been ideal for Beijing, but neither was the prospect of global oil prices surging.

Trump has also been careful in public about differences with Xi over Iran. The two leaders last met in Beijing four months ago and could meet twice more later this year. After their May talks, Trump said Xi agreed that a nuclear-armed Iran would be a bad outcome and that the Strait of Hormuz needed to reopen, though Chinese officials have neither confirmed nor denied his account of that private conversation.

The US administration has warned China not to help Iran’s military effort. Earlier this week, however, Trump played down a Wall Street Journal report that Chinese entities had provided Tehran with satellite images of a Jordanian military base before an Iranian strike in July that killed three US soldiers working there. "You know, when they say that China spies on us, I say you’re right, and we spy on them too," Trump told reporters.

At the start of the war, Trump described the conflict as a "little excursion" that would last only weeks. He has also repeatedly said oil prices would fall quickly once the war ends. Less than three months into the conflict, he said "everybody was wrong" because the worst projections on oil prices had not come true. The White House did not respond to questions on whether Trump sees China’s actions as a reason prices did not hit those worst-case levels.

Energy analysts say Beijing’s sharp reduction in imports has had the biggest effect in containing prices since the war began. According to US data, China’s crude imports averaged 8.1 million barrels a day in the second quarter, almost 4 million barrels a day, or 32 per cent, lower than in the first quarter. Michael Lynch, president of Strategic Energy and Economic Research, said, "It’s remarkable how China managed the market. They didn’t panic and by turning to their inventories they kept the price down for everybody."

With Xi set to visit Washington and the conflict still unsettled, oil markets remain exposed to fresh disruption. For now, analysts say China’s reserves, lower imports and shift to alternative energy have helped prevent the more severe price shock that many had feared when the war began.

With PTI Inputs

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