Global Oil Market Facing Depletion of Critical Supply-Demand Buffers as Prices Poised for Sharp Increase

The global oil market stands on the brink of losing the supply-demand buffers that have prevented oil prices from skyrocketing amid severe disruptions to oil flows through the Strait of Hormuz. The "window" created by the US-Iran agreement, which allowed Middle Eastern producers to rapidly export accumulated oil from the Gulf over the past four months, has suddenly closed with escalating tensions and the near-impossibility of a ceasefire extension.

The End of the Export "Window"

The conclusion of the Memorandum of Understanding (MoU) between the US and Iran has prevented Middle Eastern producers from continuing to export reserves at the accelerated pace seen in recent months. This, combined with major markets like the US experiencing depleted inventories, is creating significant upward price pressure on global oil.

According to market experts, the oil from the world's largest strategic reserve release in history has reached refineries, but is no longer sufficient to compensate for supply shortages from the Middle East region.

China's Role - The Critical Demand Buffer

Most notably is the potential for China to resume oil purchases soon after reducing imports to a 10-year low in recent weeks. This would remove the sole demand buffer that has curbed oil price increases during the March-June period.

Reduced Chinese Oil Imports

China slashed total crude oil imports to a 10-year low in June, ending three months of very low imports amid high prices and limited supply from the Middle East. Beijing was able to significantly reduce oil purchases, cutting last month's estimated imports of 4.4 million barrels per day compared to the 2025 average.

According to data released by Chinese customs on Tuesday, China's crude oil imports in June fell 41.3% from the same period last year to 29.27 million tons, equivalent to 7.12 million barrels per day. These June levels are the lowest since October 2016.

China's Massive Oil Reserves

The enormous oil reserves China accumulated before the Iran conflict began, combined with its ability to reduce imports during the first four months of the conflict, helped prevent oil prices from reaching record highs despite the loss of over 10 million barrels per day of flows through Hormuz.

China is the world's largest crude oil importer but is also the best-prepared country to cope with global supply crises. Estimates suggest that in the year before the Iran conflict began, China accumulated between 1.2 and 1.3 billion barrels of oil in commercial and strategic reserves. This figure could be even higher as reserves are closely guarded secrets, as well as regarding China's future reserve plans or usage.

Will China Resume Oil Purchases?

According to analysts, China may soon resume larger oil purchases as it has begun drawing down reserves and doesn't want to see its accumulated reserves depleted too quickly.

Estimates suggest China used its massive oil reserves in May, and this continued into June. According to estimates in the latest monthly report from the International Energy Agency (IEA), China drew down 41 million barrels from inventories last month.

Despite drawing down reserves, China hasn't rushed to buy more oil as it still holds significant inventory levels, according to Goldman Sachs noted in a report cited by the Wall Street Journal. However, the turning point could come soon, with China potentially accelerating oil purchases for July and August, according to Goldman analysts, also because Gulf producers have cut official selling prices for this and next month.

Since the beginning of the Middle East crisis in February, China has become the swing buyer in the global oil market. The world's largest crude oil importer, through very low imports in recent months, has prevented a major oil price increase. This low demand buffer from China could soon be depleted.

Rapidly Declining Oil Inventories

The end of China's demand buffer could coincide with the Strait of Hormuz remaining unresolved, preventing oil tankers from moving at the rates seen in the three weeks after the MoU was signed.

The renewed escalation and the sudden halt of oil tanker traffic through Hormuz would slow the recovery of oil flows from the Middle East, tightening the global oil and fuel market further. The significant slowdown in vessels passing through the Strait of Hormuz is expected to continue, while the reimposition of US oil export sanctions and lack of buffers in the oil market are laying the groundwork for higher oil prices if the current situation doesn't improve soon, Amrita Sen, founder and market information director at consultancy Energy Aspects, told CNBC this week.

According to Sen, the world has drawn down about 600-700 million barrels of oil inventories since the crisis began.

"If we're still in this situation by the end of this month or early next month, I don't think we've seen the worst, and I think the worst will actually come later, possibly late Q3 or early Q4," the expert told CNBC.

In comments to the Financial Times, Sen stated: "We pretty much have nothing left" of the excess inventory levels the world faced when the conflict began. "The market's complacency about Hormuz flows is being severely tested," Sen said.

Future Outlook

The global oil market faces a challenging period as key supply-demand buffers have been depleted. The end of the US-Iran agreement, rapid decline in global inventories, and potential for China to resume large-scale oil purchases could create an oil price shock in the coming period.

According to experts, if the current situation doesn't improve soon, oil prices could rise significantly in Q3 or early Q4 2024. This would not only affect oil-dependent economies but also put upward pressure on global inflation.

Closely monitoring developments in the Strait of Hormuz, China's oil purchasing decisions, and policy moves from major oil-producing countries will be key to forecasting oil price trends in the coming period.