China imported 11.3 million barrels a day of crude oil in 2023, 10 per cent more than in 2022 and a record, according to Chinese customs data cited by the US Energy Information Administration. Its refineries processed an average of 14.8 million barrels a day, also an all-time high. On the surface, those numbers describe a post-pandemic rebound. Underneath, they describe two structural changes: a refining system built for petrochemicals as much as for fuels, and a crude slate increasingly drawn from countries under Western sanctions.
More capacity, more feedstock
The record runs came as China's economy reopened after the end of its zero-COVID measures in late 2022 and as new refining capacity came on stream. The EIA notes that Chinese companies plan further additions, including the 400,000 barrel a day Yulong refining and petrochemical complex in Shandong, originally due in 2024 and now delayed to 2025.
Much of China's new capacity is integrated with petrochemical plants. These complexes are designed to convert a larger share of each barrel into chemical feedstocks, such as naphtha, LPG and aromatics, rather than gasoline and diesel. That design choice reflects a judgement about where demand growth lies. Transport fuel demand in China is expected to slow as electric vehicles spread and trucking shifts partly to LNG, while demand for plastics, fibres and other chemical products keeps growing.
There is a catch. The EIA points out that petrochemical margins in Asia have been low or negative since 2022, because Chinese petrochemical capacity has expanded rapidly while high inflation and slower growth damped demand. China has built capacity ahead of demand, and the resulting surplus of chemical products has pressured margins across the region.
Where the crude came from
Russia, Saudi Arabia and Iraq were China's main suppliers in 2023. The largest increases compared with 2022 came from Russia, Iran, Brazil and the United States.
The Russian increase was the most important. From 2019 to 2021, Russia supplied about 15 per cent of China's crude imports, second only to Saudi Arabia. After Western sanctions and the EU embargo on Russian seaborne crude, Russian oil became available at a discount, and Chinese refiners bought more of it. At the same time, China reduced purchases from relatively expensive Western European sources. Imports from Norway, for instance, fell by 100,000 barrels a day between 2022 and 2023.
The Iranian picture is more opaque. Chinese customs data show imports from Malaysia rising 54 per cent, or 1.1 million barrels a day, in 2023. But reported imports from Malaysia exceeded Malaysia's total crude production. The EIA notes industry analysts' view that much of the oil shipped from Iran to China was relabelled as originating elsewhere, often Malaysia, to obscure its source. Iranian crude is subject to US sanctions, and Chinese buyers, mostly independent refiners in Shandong, have taken large volumes at discounted prices.
Why the slate matters
The shift in China's crude slate has three consequences.
The first is price. Discounted Russian and Iranian crude lowers feedstock costs for Chinese refiners, improving margins at a time when product markets are weak. It gives them a cost advantage against refiners elsewhere in Asia that pay full price for Middle Eastern or Atlantic Basin crude.
The second is market structure. A large part of the world's sanctioned crude now flows to a single buyer. That gives China leverage over Russian and Iranian sellers, but it also exposes its independent refiners to enforcement risk if Western governments tighten secondary sanctions on buyers, shippers or banks.
The third is geopolitical. China's purchases of sanctioned oil provide revenue to Moscow and Tehran, which complicates China's relations with the United States and Europe. Beijing maintains that it does not recognise unilateral sanctions and that its trade is legitimate. Washington has periodically targeted Chinese entities involved in the Iranian trade.
Brazil and the United States
The rise in imports from Brazil and the United States is less dramatic but still meaningful. Both are major non-OPEC producers whose output is growing. Brazilian pre-salt crude has become a staple for Chinese refiners, and US crude flows to China respond to price spreads and to the state of trade relations between the two countries. Their increase in 2023 suggests Chinese buyers are diversifying across supply regions even as they take more sanctioned oil.
Teapots and the state majors
The two halves of China's refining sector behave differently. State-owned majors such as Sinopec and PetroChina operate large integrated complexes and buy much of their crude under term contracts with national oil companies in Saudi Arabia, Iraq and elsewhere. The independent refiners, many clustered in Shandong and known as teapots, buy more opportunistically and depend heavily on import quotas allocated by Beijing. It is the independents that have absorbed most of the discounted Iranian supply. Their margins, and therefore their appetite for sanctioned crude, rise and fall with quota allocations and with the size of the discount on offer.
What 2024 looks like
The record of 2023 is unlikely to be repeated at the same pace. Chinese oil demand growth is slowing as electric vehicles take a growing share of car sales and LNG trucks displace some diesel use. Refinery runs will depend on whether new capacity is added on schedule and on export quotas for refined products, which Beijing adjusts to manage domestic oversupply.
Crude imports may also be affected by stockbuilding. China has expanded strategic and commercial storage, and import volumes in some years reflect inventory accumulation rather than consumption. When prices are low, Chinese buyers tend to import more for storage.
The policy question
China's crude imports in 2023 tell us less about demand than about how Chinese refiners are positioned. They have more capacity, they are oriented toward chemicals, and they are buying an unusually large share of their crude from sanctioned sellers at a discount. Each of those choices makes sense commercially. Together they make the Chinese refining system more exposed to petrochemical oversupply on the product side and to sanctions enforcement on the supply side.
For global oil markets, the important variable is the second. If Western governments decide to enforce sanctions more aggressively against buyers, shippers and insurers in the Iranian and Russian trades, Chinese refiners would have to replace discounted barrels with full-price crude, tightening markets for everyone else. If enforcement stays limited, the current arrangement, in which sanctioned oil flows east at a discount, is likely to persist.