If the fracturing of the oil market in 2022 played out in Moscow, Brussels, Washington, and Riyadh, all roads for oil markets in 2023 and beyond lead to Beijing.
How did China stumble into becoming the regulator of global oil markets? A thread 🧵
#OOTT
How did China stumble into becoming the regulator of global oil markets? A thread 🧵
#OOTT
China has never fashioned itself, at least publicly, as a particularly willing regulator of global oil markets.
It has never had grandiose strategic aspirations of managing oil markets beyond its own energy security and diversification priorities
It has never had grandiose strategic aspirations of managing oil markets beyond its own energy security and diversification priorities
By circumstance more than by design, it has found itself in the driver seat.
It was the perfect alignment of the maturation and scale of China’s oil industry (long in the making) and the fracturing of the oil system in 22-23 (sudden). Right place, right time.
A story in 4-parts
It was the perfect alignment of the maturation and scale of China’s oil industry (long in the making) and the fracturing of the oil system in 22-23 (sudden). Right place, right time.
A story in 4-parts
1) Demand: China will be the largest source of global oil demand growth in 2023-2024.
This isn't breaking news, Chinese demand has defined the last 20 yrs. Post-reopening boost however, domestic demand may become the lesser source of China's oil influence for the first time.
This isn't breaking news, Chinese demand has defined the last 20 yrs. Post-reopening boost however, domestic demand may become the lesser source of China's oil influence for the first time.
2) Global supply: China (along with India) is now the swing buyer in a suddenly far deeper “gray” barrel market.
How much it buys will directly and indirectly drive how much suppliers of grey barrels (RU,IR and to a lesser extent VZ) are able to produce.
How much it buys will directly and indirectly drive how much suppliers of grey barrels (RU,IR and to a lesser extent VZ) are able to produce.
What sanctions and price caps have done by funneling Russian crude towards China and India is hand both buyers leverage on pricing and ultimately supply, with the ability to tighten the noose or loosen it.
3) Global refining: China is the swing refiner to a suddenly more supply-constrained product market.
With spare refining capacity and controlled exports via the quota system, policy decisions can fundamentally alter the relative tightness of the global product market.
With spare refining capacity and controlled exports via the quota system, policy decisions can fundamentally alter the relative tightness of the global product market.
4) Oil storage as a management mechanism:
Over much of 2010-2020, oil storage in China served largely the singular purpose of being filled, with the rate of fill the main uncertainty. But what was once a one-way street now runs two-way traffic.
Over much of 2010-2020, oil storage in China served largely the singular purpose of being filled, with the rate of fill the main uncertainty. But what was once a one-way street now runs two-way traffic.
China has since shown the willingness and ability to exert influence (direct and indirect) on its industry to lean on inventories when prices run hot or buy opportunistically when air pockets emerge, as they did in December 2022.
In practice this allows China to swing its crude imports wildly (as it did in 2022) in response to market conditions. For a market that prices at the margin, a month-on-month swing of 1-2 MMb/d is a balance wrecking ball.
The two key features that underpin all of these are scale and control.
Scale - it is large enough in all of these fields to drive global balance-altering changes.
Control - gov policymaking can & will directly and indirectly nudge in the direction of desired outcomes.
Scale - it is large enough in all of these fields to drive global balance-altering changes.
Control - gov policymaking can & will directly and indirectly nudge in the direction of desired outcomes.
To recap in a sentence:
By remaining a driver of global demand, influencing supply via imports of gray barrels, using storage as a market intervention tool, and calibrating refined product exports, China has become the de facto regulator of global oil markets.
By remaining a driver of global demand, influencing supply via imports of gray barrels, using storage as a market intervention tool, and calibrating refined product exports, China has become the de facto regulator of global oil markets.
Key takeaway: if you're trying to figure out where oil markets are heading next, spend a bit more time on China. It's worth the effort.
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