From supply shock to demand anxiety: China’s demand takes centre stage in the crude market

As the US-Israel war against Iran passed the 100-day mark, fears of extremely high oil prices stemming from Middle East supply losses have quickly waned. While the market remains broadly balanced for now, attention is increasingly turning to the possibility of a minor oversupply in Q3 as additional Middle East supplies emerge and Chinese buying remains subdued.

Market & Trading Calls

• Bearish Dubai time spreads as rising Persian Gulf exports routed through reduced-visibility channels are adding more prompt barrels to the market than expected.
• Bearish Middle East crude premiums: Oman and Murban premiums are likely to remain under pressure as additional Middle East-origin barrels emerge and buyers gain optionality.
• Bearish prompt crude balances until Chinese buying returns: China's ability to draw down inventories at roughly 1 mbd for months reduces the urgency to procure seaborne crude. With refinery runs weak, product inventories elevated, and imports likely to remain near recent lows, China remains a passive buyer, leaving the market vulnerable to a minor Q3 oversupply.

In previous reports, we argued that the oil market had managed to settle into a tight balance through inventory drawdowns, rerouted exports, higher Atlantic Basin supplies and demand destruction. As these balancing mechanisms continue to hold, rising flows from the Middle East and the potentially prolonged absence of Chinese procurement demand risk tipping the market into a slight oversupply in Q3.

While a limited number of vessels carrying non-Iranian crude continue to transit the Strait of Hormuz after receiving approval from the IRGC, Persian Gulf producers increasingly rely on reduced-visibility shipping practices to maintain supply flows through the waterway and market cargoes via STS transfers near Fujairah and Sohar. Kpler identified 858 kbd of such exports in May, surging from 237 kbd in April, with volumes continuing to trend higher so far this month. While it remains difficult to pinpoint the exact origins of these cargoes, they are understood to be largely linked to the UAE, with the remainder likely associated with Iraq and Kuwait.

While the market is still trying to gauge the scale of these previously unexpected flows, ADNOC sold at least 13 mb of June-August loading Upper Zakum, Das and Umm Lulu cargoes to refiners in China, South Korea, Malaysia, India and Japan, as well as to a trading house, according to market participants. Shortly after closing those deals, ADNOC issued another tender this week to sell cargoes originating from within the Persian Gulf for the same loading period, suggesting the company expects these flows to be sustained. As a result, the Dubai M1-M3 spread narrowed to $5.8/bbl on Monday from around $8/bbl in late May, while Oman and Murban premiums against Dubai swaps also eased amid rising Persian Gulf supplies.

Gulf of Oman crude/co exports by grade (as of June 8), kbd

Source: Kpler

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