China's Role in Reducing Oil Prices from $114 to $78 per Barrel

As the United States and Iran continue negotiations regarding the permanent reopening of the Strait of Hormuz and the resumption of Middle Eastern oil flows, the future trajectory of oil prices appears to hinge on China, a country not involved in these talks. According to CNN, China has played a central role in mitigating the effects of the global supply crisis.

The network reported on Monday that Beijing, as the world's second-largest crude oil consumer, has utilized various measures to maintain supply stability following disruptions caused by the conflict in Iran, which affected access to over 11 million barrels of oil per day.

Despite significant interruptions to oil flows through the Strait of Hormuz, markets have remained balanced thanks to alternative sources and reserves, amid warnings of potential price surges if the conflict escalates.

CNN highlighted that China, by reducing imports, relying on substantial stockpiles, and expanding the use of clean energy, has absorbed most of the domestic impact of rising prices, nearly eliminating it entirely.

The impact of these measures has extended to global markets as well. More than three months into the war, some analysts predicted oil prices could reach $200 per barrel this year, yet prices have stayed relatively stable despite estimated total supply losses exceeding one billion barrels. Many analysts attribute this stability primarily to China.

Dan Walter, an official at the Ember Energy Research Center, told CNN, "China has played a critical role in absorbing the shock for the rest of Asia and thus helped protect the global economy."

On Monday, Brent crude, the global oil price benchmark, fell below $78 per barrel amid expectations of a near return to normal trade through the Strait of Hormuz, which handles about one-fifth of the world's oil supplies.

Before the US and Israeli attacks on Iran, Brent traded below $70 per barrel, then reached a four-year high of $114 per barrel in early May.

With China's growing influence in the global energy sector, analysts believe its policies and consumption patterns will remain decisive in determining market direction, regardless of how quickly the Strait of Hormuz reopens.

China's Impact on Global Oil Supply and Prices

In a research note released earlier this month, analysts at Société Générale pointed out that the 7% loss in global oil supplies during the 1973 Arab oil embargo led to a 134% price increase. However, during the Iran war, despite a 14% impact on global supplies, prices did not experience a similar spike.

They largely attribute this discrepancy to China, describing it as "the hidden hand restoring market balance," due to its ability to reduce oil imports by about 3 million barrels per day, nearly equal to Japan's total crude oil demand.

China's shift toward electricity and clean energy amid the ongoing Iran war has helped ease the global energy crisis by reducing its oil imports.

Yaniv Shah, Vice President of Oil Markets at Rystad Energy, explained that China significantly cut consumption for several reasons, including building additional crude oil reserves before the war, taking advantage of low-cost supplies from sanctioned oil sourced from Russia and Iran.

Analysts note that Beijing currently holds over one billion barrels in commercial and strategic reserves and began drawing from these stocks in May.

Shah added, "Beijing has always worked to set a price floor, but this pattern reversed this year."

The Chinese government also imposed restrictions on exports of refined products such as diesel and gasoline to ensure domestic demand is met, which reduced incentives for Chinese refineries to purchase crude oil from global markets amid declining profit margins and fewer export opportunities.

Simultaneously, the booming electric vehicle market in China has lowered the country's reliance on fossil fuels, with one out of every two new cars sold in China powered by clean energy.

According to the International Energy Agency, China's electric vehicle fleet contributed to reducing oil consumption by about one million barrels per day last year.

David Fishman, an expert on Chinese energy and electricity at Lantau Group, stated, "This has provided an important safety valve for the global crude oil market."

Fishman noted that sustained high prices will affect demand from consumers and refineries, but China's capacity to absorb shocks from global supply shortages depends on the size of its reserves.

He added, "What cannot continue indefinitely is relying on stockpiling crude oil. If prices fall, China is expected to be the first to increase purchases to rebuild its reserves."

Outlook on Oil Supply and Market Dynamics

After months of monitoring what has been described as the worst oil crisis in history, the International Energy Agency warned that reopening the Strait of Hormuz could lead to a supply surplus next year.

In its monthly report issued Wednesday, the agency forecast that supply growth will exceed demand by 4.7 million barrels per day next year, as crude oil production in the Middle East returns to normal levels.

The agency stated, "This could provide a welcome relief for the market and an opportunity to replenish depleted stocks or build new strategic reserves, as countries reassess their energy strategies and policies in response to the crisis."

Despite expectations of global oil demand growth next year, recent disruptions have increased interest in renewable energy sources, which may reduce crude oil consumption over the long term, according to CNN.

China, a global leader in electric vehicles, batteries, and solar energy, recorded record exports of clean energy technologies in March following the outbreak of war in Iran.

The country aims to double its clean energy supplies by 2035 through approving new projects to advance the green transition.

Cosimo Rees, an analyst specializing in energy and automotive sectors at Trivium China, said, "This acceleration toward electricity is gaining momentum. We will need to monitor the US-Iran negotiations closely, but generally, this could be an important moment for global carbon emission reduction efforts."

Moyu Shu, Senior Crude Oil Research Analyst at Kpler, a commodity data platform, indicated that a supply surplus could appear in the market starting next month.

She added that if the Strait of Hormuz reopens quickly, approximately 100 million barrels of previously stranded oil could return to markets.

At the same time, Iran is likely to significantly increase oil production, especially if US sanctions are lifted. However, this might reduce the attractiveness of Iranian oil to China, which has traditionally purchased it at discounted prices due to Tehran's limited marketing options under sanctions.

Nevertheless, Shu pointed out that many countries have already met their oil needs for the summer, potentially positioning China once again as a key player in restoring market balance.

She concluded, "The situation is entirely different from just two months ago. Currently, China is the country capable of absorbing the supply surplus. The question remains: what does Beijing want to buy?"