The U.S.-Iran agreement to reopen the Strait of Hormuz could prompt China to return to buying more crude after months of multi-year-low purchases, which could reignite inflationary pressures despite the expected ease of oil flows from the Middle East.
Late on Sunday, the U.S. and Iran announced a deal to reopen the Strait of Hormuz more than 100 days after its closure. This re-opening could happen as soon as an agreement is signed on Friday. News of the deal sent oil prices tumbling early on Monday, with Brent Crude prices down to $83 per barrel, and WTI Crude at the $80 a barrel handle.
If the agreement holds and flows through the Strait of Hormuz, begin to tick up relatively quickly, China could resume buying more crude, and this additional demand, which had vanished in the past three months, could tighten the oil market and drive up inflation, analysts at Bloomberg Economics said in a note on Monday.
“Any recovery in Chinese oil demand — particularly if energy flows remain constrained — could tighten global energy markets, reignite inflation pressures and complicate the task facing central banks,” Bloomberg Economics’ analysts wrote.
Energy flows are likely to take months to recover to pre-war levels, assuming the deal holds and traffic through the Strait of Hormuz sustainably increases, analysts say.
China’s severely reduced crude oil imports have been a key anchor keeping oil prices below $100 per barrel during the past few weeks, alongside record U.S. crude and fuel exports and global releases from strategic oil stockpiles coordinated by the International Energy Agency.
Crude oil imports to China in May fell to their lowest since October 2017 due to the price spike.
The world’s top crude importer started tapping its huge oil reserves last month, in a sign that Beijing is still refraining from paying top-dollar for prompt crude deliveries. So far into this unprecedented crisis, China has slashed refinery run rates, limited exports, and cut demand for road transportation fuels as consumers prefer driving EVs over paying high gasoline prices.
The key question for the oil market is how much demand China would generate when it returns to more active crude purchases.
By Tsvetana Paraskova for Oilprice.com
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