China put in oil markets may reshape global supply, trade dynamics

By David Fickling

 

There are few things sellers in financial markets like more than a government put. 

 

Such a situation — where a powerful state player makes a tacit promise to buy whenever prices fall too low, similar to the put contracts used by options traders — can dampen risk for years. The “Greenspan put” helped prop up equity markets from the 1980s to the 2000s, while the “Biden put” buoyed crude for two years until last November.

 

Something similar has been happening with China’s actions in the oil market. The biggest importer has been stockpiling hydrocarbons, despite the fact that its own consumption already appears to be peaking. That’s helping the world ride out a surge in supply, as the Organization of the Petroleum Exporting Countries unwinds quota restrictions imposed since 2022.

 

 

My colleague Javier Blas last month outlined six theories for what’s going on. Given the centrality of the China put to oil markets in 2025, however, there’s plenty of other conjectures out there. Here are three more explanations worth considering. 

 

Saving state Champions

 

Opec’s supply increase is a surgical strike on its most fearsome rivals: American oil producers. In the Middle East, you can make good money at low prices, but shale in the US struggles below $60, which is where things are headed right now. You get a glimpse of how gloomy the outlook is in the Dallas Fed’s latest survey of the energy industry. “We have begun the twilight of shale,” one anonymous executive told the bank. “Those who can are running for the exits,” wrote another.

 

China has a similar problem. In recent years, Beijing has pressed state-owned producers to invest in harder-to-access fields to reduce dependence on imports. That spending is now bearing fruit — from a 10-kilometer (6.2 mile) deep well in the deserts of Xinjiang province to a 1.15 billion-barrel shale reserve announced last month at the legendary Daqing field northeast of Beijing. It hasn’t come cheap, though.

 

At PetroChina Co., which accounts for more than half of output, the cost of developing and extracting new reserves has risen to a shale-style $60 a barrel in recent years, according to data compiled by Bloomberg. Major fields like Daqing are ageing after decades in operation, forcing PetroChina and its state-owned peers increasingly to exploit tight deposits that would be familiar to Texan frackers.  

For the oil-rich US, a collapse in domestic production is an embarrassment, but hardly an emergency. In China, where about 70% of petroleum is imported, it would be a serious strategic vulnerability, given current geopolitical tensions. Keeping prices up and state oil companies profitable is a national security matter. 

 

Supporting exports

 

Petroleum producers aren’t the only companies Beijing wants to prop up. Manufacturers have saved the economy from the collapse of its housing sector since 2022, thanks to the world’s voracious hunger for China’s exports. 

 

That pivot hasn’t been helped by the way the US, and to a lesser extent other developed countries, have taken fright at China’s industrial sway, imposing tariffs and shunning its products in response. Sales have been booming to one group of countries, however: oil producers.

 

China’s exports to the Organisation for Economic Co-operation and Development, the club for rich democracies, fell about $75 billion between 2021 and 2024 — but those to the OPEC+ group of oil exporters increased by more than twice that amount, as Saudis hoovered up solar panels and lithium-ion batteries and Emiratis bought smartphones and BYD Co. electric cars. The $48 billion increase in sales to Russia alone was nearly enough to offset the $52 billion decline to the US.

 

Just as wealthy Gulf oil producers extend loans to the likes of Pakistan and Egypt to keep them buying petroleum, Beijing will hope that higher crude prices will prop up Gulf emirates and juice its own trade figures. 

 

“China has a huge incentive to keep oil prices up,” veteran oil market analyst Phil Verleger wrote recently. “In doing so, it strengthens the income of countries that rely on its exports.” 

 

Buyers and sellers

 

That doesn’t mean the interests of Beijing and OPEC+ are fully aligned, however. In fact, they’re naturally opposed.

 

China is desperately short of crude oil, but it’s rich in processing plants, overtaking the US last year to become the world’s biggest refiner by capacity. Refiners make their best money when there’s an oversupply of crude, allowing them to push down their raw materials costs while keeping prices for the products they sell, like gasoline and diesel, more elevated. Tricking your suppliers into a glut is simply good business sense.

 

China’s refineries are also some of the largest, newest, and most complex globally, making them best positioned to manage in turbulent times, especially as the world is switching away from road fuel to plastics, chemicals and jet kerosene.

 

If Beijing stops stockpiling and the current crude oversupply deepens against a backdrop of declining consumption, the winners in the resultant bloodbath will be the big new refineries buying cheap Middle Eastern (and sanctioned Russian, Iranian and Venezuelan) oil. China Inc., in other words. Older plants with higher costs and less flexibility to adapt, particularly those in Europe, will face Armageddon.

 

That’s a troubling prospect. If you think the world has been worried in recent years about China taking control of clean energy supply chains, just wait till the same thing starts happening to oil.  (Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper)