Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Is Driving the Global Oil Price Surge
Transcript
- Lucas: It's July 23, 2026. US crude just crossed $90 a barrel, Brent is above $98, and a lot of the headlines are pointing at the Houthi strikes on tankers off Saudi Arabia. That's real. But there's a quieter force in this rally that's actually more structural. Luna: You're talking about China. Lucas: Exactly. China is the world's largest crude importer, and what Beijing does with its strategic reserves, its state-owned refiners, and its new oil pricing benchmarks matters a lot more than the daily headlines suggest. So today I want to look at the oil price surge through a China lens. Luna: Alright, lay it out. What's Beijing actually doing here? Lucas: Well, let's start with the data. China's imports of goods and services hit 4.3 trillion dollars in the latest reading, up from 4.1 trillion a year earlier. A big chunk of that is crude. Even as the economy slows, Chinese refineries are running near record rates. Luna: And they're also building strategic reserves. I remember reading that China has been filling its caverns aggressively over the past two years. Lucas: Right. Beijing doesn't publish exact numbers, but independent analysts estimate the strategic petroleum reserve now holds over 900 million barrels. That's months of cover. And when they buy, they buy in bulk—which adds a persistent bid to the market even when global demand is soft. Luna: So you've got this steady state buying from the state, plus commercial demand. And now on top of that, you have a supply scare from the Red Sea. Lucas: Exactly. The Houthi attacks add risk premium. But the structural underpinning of this rally is China's demand profile. And there's another layer: the yuan. Luna: Oh, the oil-yuan connection. You've talked about this before. Lucas: Yes. The Shanghai crude oil futures contract—traded in yuan—has grown to become the third-largest oil benchmark in the world. As China pushes yuan settlement for trade, more sellers are pricing cargoes in yuan. That shifts the center of gravity away from Brent and WTI. Luna: And gives Beijing more control over pricing dynamics, even if they don't directly set the price. Lucas: Exactly. If a Saudi or Russian seller can get paid in yuan and then use that yuan to buy Chinese goods or invest in Chinese bonds, the oil trade becomes part of a larger financial loop. And that loop reduces the dominance of the dollar. Luna: But doesn't that also mean that when oil prices rise, Chinese import costs go up? They're paying more in yuan terms too. Lucas: Yes and no. The yuan has been relatively stable—it's at 6.78 per dollar, essentially flat over recent weeks. So the domestic price impact is muted compared to a country with a weakening currency. Plus, China's state-owned refiners can absorb some of the cost through subsidies or tax adjustments. Luna: Still, higher oil feeds into producer prices. And if that trickles to consumers, it complicates the stimulus picture. Beijing is trying to boost consumer spending. Lucas: That's the tension. You have a government that wants to stimulate consumption, but higher energy costs act like a tax. The PPI, or producer price index, has been under pressure. If oil stays elevated, it could delay the recovery in domestic demand. Luna: And for the rest of Asia, this is a big deal too. Japan, Korea, India—they're all net oil importers. Lucas: Those central banks are watching. The yen is still weak at 162 per dollar, which compounds the cost of energy imports. The Bank of Japan has a tough call on whether to raise rates again. India's rupee is under pressure. So the oil rally isn't just a Middle East story—it's a China story, and through China, an Asia-wide story. Luna: Let's talk about the China stock market reaction. You've got FXI down 0.3% over the last five days, KWEB down nearly 4%. Oil-sensitive names like airlines and manufacturers are taking a hit. Lucas: Right. Higher input costs squeeze margins. And if you look at the overall trade balance, China's surplus has narrowed. The trade surplus in goods and services dropped to 77.6 billion in May from 54.6 billion. So the external sector is less of a tailwind. Luna: Which is why the stimulus talk is getting louder. Lucas: Exactly. The government has been rolling out measures to boost consumption—subsidies for EVs, tax cuts for smaller households. But if a big chunk of that is eaten up by higher fuel costs, the multiplier effect is weaker. Luna: There's also the geopolitical angle. The US and Europe are watching China's relationship with Iran and Russia, both major oil producers. China is buying discounted Russian crude, which helps Moscow but also undercuts Western sanctions. Lucas: That's a key point. China imported record volumes of Russian oil last year, much of it priced above the G7 price cap, which means Western insurers and shippers aren't involved. That shadow fleet is real. And it's part of why the market isn't as tight as it would be otherwise—Russian oil is still flowing, just through different channels. Luna: So in a weird way, China is both driving the price up through demand and keeping a lid on it by providing a market for sanctioned crude. Lucas: Exactly. It's a dual role. And that makes the oil price outlook really hard to predict. You have to factor in China's strategic buying, its refining runs, its currency policy, and its foreign policy all at once. Luna: And that's part of why we dig into this—because it's complicated, and most coverage just points at the Houthis and moves on. Lucas: Right. We think it's worth spending time on the structural forces. And that's also why we keep this podcast ad-free. We want the freedom to follow the data wherever it leads, without worrying about sponsor messaging. Luna: If walking through the economy with us has made something click, and you want to support that independence, there's a simple way. It's buy me a coffee dot com slash fexingo. Lucas: No pressure, ever. But listener support is what lets us keep the episodes free for everyone. And we really appreciate it. Luna: Okay, back to oil. So Lucas, where do you see the biggest risk for China in this oil price environment? Lucas: I think the biggest risk is if oil stays above $100 for an extended period. That would test Beijing's ability to manage inflation expectations. The central bank has been cautious on easing. If imported inflation picks up, they have less room to cut rates. Luna: And that would slow the recovery in housing and consumption. Lucas: Exactly. So watch the yuan exchange rate. If it weakens past 7 to the dollar, that would amplify the oil cost further. For now, the PBOC is keeping it stable around 6.78. But if the dollar strengthens—and the trade-weighted dollar index is at 120.5, up a bit—they'll have to spend reserves to defend it. Luna: And the oil market itself? Are you expecting a pullback? Lucas: Short-term, geopolitical risk could fade, especially if there's a ceasefire in the region. But the structural demand from China isn't going away. Their vehicle fleet is still growing, even if EV penetration is high. Petrochemical demand is rising. So I think oil stays elevated, maybe in the $85-$100 range, for the rest of the year. Luna: That's not great for Asia's importers, but it does underscore China's shift from a price taker to a price maker. Lucas: Exactly. And that's the bigger story: not just today's tanker strike, but the slow, steady reshaping of global energy markets by Chinese demand and Chinese financial infrastructure. It's something we'll keep watching. Luna: Alright, thanks Lucas. And for our listeners, we'll be back tomorrow with another angle on China's economy. Lucas: Take care, everyone.