Why does China matter so much to oil prices?
China is the world's largest buyer of crude oil. When its demand rises or falls, global energy markets take notice
In the early stages of the Middle East conflict, many analysts were surprised that oil prices did not rise more sharply despite the world losing 20% of its crude supply. One reason was that China dramatically reduced its purchases of crude oil. Between February and June, Chinese imports fell by around 5.5 million barrels per day, helping to offset the supply shock.
Some analysts estimate that this reduction may have lowered Brent crude prices by as much as $30 per barrel compared with where they might otherwise have traded. Now that Chinese imports are increasing again, that downward pressure on prices is fading.
Rebuilding strategic reserves
The recent increase in imports is not simply a reflection of stronger economic growth. A major driver appears to be China's effort to rebuild oil inventories that were steadily depleted during the conflict.
China possesses the world's largest crude oil reserves, estimated at around 1.4 billion barrels at the end of 2025. Much of this oil is held in commercial storage facilities rather than government-controlled strategic reserves.
During the period of high prices and geopolitical uncertainty, China relied heavily on these stockpiles instead of purchasing expensive oil on international markets. After several months of depletion, refiners are now being encouraged to replenish inventories.
The government has relaxed restrictions on exports of refined petroleum products such as diesel and petrol. This policy change allows refiners to benefit from attractive export markets while simultaneously rebuilding domestic oil stocks.
Do refiners have strong incentives to buy more oil?
Chinese refiners currently have a compelling business case for increasing imports.
Profit margins for producing fuels such as diesel and petrol have improved significantly. In energy markets, the difference between the price of refined products and the cost of crude oil is known as the ‘crack spread’. A wider crack spread generally means refiners can earn larger profits.
These margins are currently at historically elevated levels globally, partly because refining capacity remains constrained in several regions.
At the same time, Chinese refineries still have spare capacity. Independent refiners are operating at around 61% utilisation, well below pre-conflict levels, while state-owned refiners also remain below previous operating rates. This means production could increase further without major new investment.
Could rising oil demand push inflation higher?
China's return to the oil market could create renewed inflationary pressure worldwide via higher costs of transportation, manufacturing and consumer goods.
Interestingly, China has so far experienced relatively little inflation despite the global energy shock. Consumer price inflation (CPI) stood at just 0.8% year-on-year in August, below official targets and well below levels seen in many Western economies.
This low inflation environment gives China more flexibility than many countries. Higher energy prices may actually help policymakers combat the country's persistent risk of disinflation — a situation where price growth becomes too weak and economic activity slows.
However, if Chinese demand contributes to higher global oil prices, the effects will not be confined to China. Rising energy costs could sustain inflation pressures across major economies, making it more difficult for central banks to lower interest rates.
What does this mean for central banks interest rates and businesses?
Central banks such as the US Federal Reserve, the European Central Bank and the Bank of England closely monitor inflation when setting interest rates, and China’s increased demand for oil is a risk of higher inflation.
If inflation remains stubbornly high, policymakers are more likely to maintain restrictive monetary policy or delay interest rate cuts – resulting in higher yields. The effect on businesses is likely higher debt borrowing costs and delayed or curtailed investment decisions.
The impact on China's economy
There are trade-offs for China.
Greater oil imports increase the country's energy import bill and can worsen its trade balance.
Because China imports far more crude oil than it exports in refined products, rising energy purchases generally create a larger deficit in energy trade.
Increased imports also require more purchases of US dollars to pay suppliers, which can place downward pressure on the Chinese currency, the yuan.
However everal longer-term factors continue to support the yuan, including China's strong export performance, long-term undervaluation and a shift towards higher-value manufactured exports.
