• China’s oil imports remain low as COVID-19 restricts internal movements.
  • Daily imports in July are hovering around a 47-month low.
  • As the world’s oil markets remain tight and inflation is running rampant, China’s reopening deferrals are going a long way toward turning an inflation tsunami into something a little more manageable.

Oil price backdrop

Oil and energy are linked to nearly every commodity and service consumed. From the grain in your cereal to the street lights guiding your car home, all require energy to produce and maintain.

Since the commencement of the reopening of the world economy in 2021 and the reshuffling of customers over the recent upheaval in Europe, energy raw materials producers have been playing catch up.

Oil prices threatened to smash through historic highs and keep going until emergency action by the US government and a massive response from US oil producers just managed to keep a lid on the market.

China playing its part


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In 2021, Russia exported approximately 5 million barrels of oil and oil products to Europe. With that supply being cut off, Europe has had to scramble, diverting West Africa, North Africa, US and Middle East barrels, sending prices surging.

The US has responded by exporting more than 2 million barrels per day of oil and oil products than it did in 2021, with the majority going to Europe. That still leaves a material gap of 3 million barrels per day to bridge.

Step forward China

With the requirement to find another 3 million barrels of oil and oil products on the open market that isn’t Russian, Europe has been fortunate to find that China’s crude oil imports have stemmed, allowing excess to be diverted to European ports.

This is because China is finding some discounted Russian supply being marketed, and also, it requires 2 million barrels per day less than it might if the economy was fully reopened.

Europe balancing act

Europe is then balancing its books by buying a little more from its suppliers in the Middle East and Africa and keeping a bit more of its own North Sea supply.

The tightness in the Western crude oil markets remains, but prices are not as dizzyingly high as they might be without the Chinese policy at home.

The most likely outcome of a full Chinese reopening over the last 12 months would mean much higher raw materials prices for the world and prices at the pump for Australians much higher than they already are.

The numbers are in

By taking this approach, China has maintained a favourable trade balance and kept a lid on inflation at home.

This has helped the Chinese leadership to extend its policy direction. Strong international trade, high employment and full bellies spell out a more prosperous nation when untethered inflation might have upended the situation entirely.

The Chinese trade balance was a positive $101bn for July, beating the consensus by more than 10%. Exports ticked up, and as a result, so did the foreign exchange reserves, giving the Government some time and capital to find an exit.

Australia also benefits

With Australia’s largest trading partner remaining in rude health, the benefits extend to these shores. Fortescue Metals Group ASX:FMG (FMG) and BHP Billiton ASX:BHP (BHP) continue to reap the benefits of robust Australian raw materials, particularly iron ore, driving employment and prosperity for all of Australia.