Russell: China imports most energy but has the best position on Iran

China, the world's biggest energy importer, is vulnerable to the rise in prices of crude oil and natural gas caused by the conflict between Israel and United States against Iran.

China's huge crude oil stockpile is likely to be a buffer against any price spikes in the world, so that any energy-driven inflation will not affect China.

In the event that crude oil supplies from the Middle East are disrupted for a long time, it is possible that China’s refiners could make a windfall profit by increasing exports of refined goods.

China can refine crude oil and export products like diesel and gasoline in order to profit from the inevitable rise in fuel prices.

China also has another advantage, as it is the largest buyer of Russian crude that is sanctioned but at a discount. It's also the final destination of any Iranian crude on the sea that manages to leave the Strait of Hormuz prior to the weekend attacks of Israel and the United States.

China does not reveal how much crude oil it adds to its commercial and strategic stocks, but you can estimate the surplus by adding up crude imports with domestic production then subtracting refinery output.

China's crude surplus was 1,13 million barrels per day (bpd), with a particularly strong build-up towards the end of the calendar year, as imports increased sharply. They reached a record of 13,18 million bpd by December.

Although official data on imports, refinery production and the first two months of this year have yet to be released it is likely that the high levels of inventories continue.

LSEG Oil Research estimates that China's crude oil imports for the first two month were 12.47 million bpd, as refiners in the country took advantage of the discounted Russian and Iranian barrels.

If the domestic production remained relatively stable from December's levels of around 4,2 million bpd while refinery throughput stayed at around 14,7 million bpd then the surplus in January-February could be as high as 2 million bpd.

China has two options to deal with this surplus crude.

Brent crude futures ended Monday at an all-time high of $76.77 a barrel, a 7.3% increase.

By May or June, it would not surprise me to see China's exports fall to around 10.5 million bpd.

Second, China can maintain a robust refinery output, ensuring its own supply, and even increasing fuel exports in the event that Asian prices rise due to a shortage of Middle Eastern crude.

Beijing controls the domestic fuel prices, so Chinese businesses and consumers will not be affected by any spikes in energy inflation in the United States or Europe.

COAL and LNG

China's advantage goes beyond crude oil and includes coal as well as liquefied gas (LNG).

China, the world's largest LNG importer, has demonstrated in previous episodes of high LNG prices that it will reduce spot purchases and take only long-term cargoes which are usually either fixed or oil-linked.

China could also resell LNG to its utilities, allowing them to increase profits.

China could boost its domestic natural gas production for a brief period of time and also increase imports via pipelines to central Asia and Russia. This would ensure that any price spikes on the global market do not reach the Chinese market.

Platts data shows that the benchmark Asian LNG price, which is widely used to measure Asian LNG, jumped 39% Monday morning. The S&P Global Energy Japan Korea-Marker was $15.068 per million British Thermal Units, Platts' data revealed.

China, the world's largest coal producer and consumer, has the flexibility to increase its domestic production and reduce imports in case seaborne coal prices rise due to increased demand for LNG as an alternative power source.

China imports thermal coal mainly from Indonesia. It is of lower energy content, so it's not wanted by European buyers and utilities in Japan and South Korea.

China, like crude oil and LNG, is protected from any increase in coal prices.

GlobalCOAL, which assesses Australia's benchmark Newcastle Coal at $121.13 per metric ton, was up 4.7% on Monday from its previous close.

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These are the views of the columnist, who is also an author. Clarence Fernandez edited this article

(source: Reuters)