It’s almost sixth months to the day that the WHO first declared a public health emergency of international concern. And yet the COVID-19 pandemic continues to accelerate. The virus is spreading like wildfire across the Americas while Europe and Asia are displaying worrying signs of a second surge in cases. The upshot is that the spectre of renewed containment measures looms large. All the while, market players await further US stimulus. Lawmakers in Washington are gearing up for fraught negotiations to secure a new coronavirus aid package. The current one is due to expire on Friday. Investors are also bracing for the outcome of the Federal Reserve’s latest policy meeting which concludes today.

Amid this backdrop of uncertainty, risk assets fell out of favour on Tuesday. Shares on Wall Street retreated while oil prices were dealt a further blow by a revived dollar. Meanwhile, the outlook for air travel and jet demand darkened further after the IATA warned the recovery in air traffic in 2H20 will be slower than expected. Moreover, it now forecasts air demand to reach pre-crisis levels in 2024, a year longer than previously expected.

Back to the here and now, the API reported that US crude stocks fell by 6.8 million bbls last week, confounding expectations for a build of 357,000 bbls. That said, the absolute stock level of 531 million bbls is unchanged from last week, suggesting that stocks were in fact steady. On the product front, gasoline stockpiles rose by 1.1 million bbls, dashing hopes for a draw of 733,000 bbls. Distillate fuels inventories posted a surprise gain of 187,000 bbls.

Hitting the brakes

Oil bulls should thank their lucky stars for China. While other countries struggle with fuel demand recovery, China is leading the path back to normalcy and in doing so acting as a major pillar of price support. The world’s biggest crude importer set consecutive records in May and June at 11.3 mbpd and 12.9 mbpd respectively. China’s crude shipments are expected to surge beyond 13 mbpd this month, according to Refinitiv.

These record inflows are the legacy of opportunistic buying during an oil price crash in April. Yet China is in short on company. Other major buyers in the region did not stock up on cheap crude hence their crude import levels have been lacklustre. What is more, unlike in China, fuel demand in neighbouring countries has yet to return to pre-COVID level. Take India as a prime example. Its oil crude imports fell in June to 3.2 mbpd, the lowest since October 2011 and well below the 4.1 to 4.7 mbpd range leading up to the coronavirus pandemic. Likewise, Japan’s thirst for crude is also struggling to recover. Imports reached 1.93 mbpd in June, down 14.7% from the same month a year earlier though less than the 25% decline in May. Meanwhile, South Korea’s crude imports averaged 2.35 mbpd last month, 12.6% less than a year earlier.

In short, China alone is flying the flag for the global oil demand recovery. But perhaps not for much longer. Expectations are rife that China has put the brakes on its crude buying frenzy. This comes in the wake of several unfavourable developments. For starters, Brent has doubled since April’s lows. China’s price-sensitive refiners are responding to higher oil prices by trimming their intake of foreign crude. Meanwhile, storage concerns are also casting a shadow over the near-term trajectory in Chinese oil imports. China does not disclose inventory levels but what is known is that it has amassed large crude inventories in commercial and strategic storage in recent months. Furthermore, a swelling backlog of vessels at major Chinese ports waiting to unload has emerged. These logistical constraints will likely slow new purchases. Another pressing concern is weak fuel demand across Asia. Chinese refiners are rightfully fretting about the demand hit from the COVID crisis beyond its borders. China’s product exports were down 29% in June from a year earlier amid ongoing coronavirus lockdowns. A swift recovery is not expected given the latest COVID outbreaks across Asia. Against this backdrop, Chinese refiners will have to pare back crude throughputs which in turn will weigh on overall import demand.

Chinese crude imports have been running at an unstainable pace and a key bullish oil price catalyst is now at risk of evaporating. Needless to say, a looming pullback in Chinese oil imports will significantly darken the oil demand outlook. This spells bad news for the oil balance but also the world’s biggest crude exporters. China has long been the most prized market and even more so now given the virus-hit landscape. The two main protagonists vying for dominance in China’s oil market are Saudi Arabia and Russia. The two oil superpowers have been engaged in a long-running tussle with the Saudis gaining the advantage most recently. The OPEC kingpin delivered a record 2.17 mbpd of crude to China last month, up 0.2% from the previous month. Yet second-placed Russia managed to narrow the gap after it shipped 1.95 mbpd of crude to China last month, 7% more than in May. Both producers will be hoping to make further inroads in the coming months as they prepare to loosen supply curbs. However, with China losing its appetite for foreign crude, they risk being left with unwanted barrels.