Key insights

Fortress China

China’s response to the Iran war has evolved from supply security to margin protection and cautious opportunism. In early March, following US-Israeli strikes on Iran and the closure of the Strait of Hormuz, the focus was on supplying the domestic market. Refiners were refused requests to draw down crude stocks and instructed instead to cut runs and focus on transport fuels rather than chemicals. Clean product exports were halted in early March and effectively banned by month‑end to the detriment of many Asian countries. Onshore crude inventories continued to build.

On the gas side, the country entered winter with ample stocks but faced a mild season. Despite a nascent recovery in industrial gas demand, users rapidly cut LNG exposure, relying instead on pipeline and domestic gas. Some are switching back to coal while others are bracing for weaker demand as the war reverberates through the global economy and hits China’s exports. Coal played its backup role: Q1 production remained high, new thermal capacity came online, and coal‑fired power stepped in when March wind generation fell sharply, and LNG markets tightened. Coastal provinces seeing warmer weather are stocking up on coal.

Capitalising on chaos

With muted domestic gas demand, Chinese players re-sold LNG cargoes into Asia, benefitting from high spot JKM. These slowed in April as domestic demand picked up, but buyers will try to avoid spot LNG imports in the coming months. The opposite is happening in oil. The cost of hoarding has started to bite. In April, with more clarity on the scale of the shortfall and new crude supply routes via Yanbu, Russia and the Atlantic (plus a trickle of Iranian barrels through Hormuz), Beijing appears more confident in managing the shock. It is now also looking to minimise costs. Shandong independents have been told to maintain runs at 2024–25 levels and handed time‑limited crude import quotas and tax deferrals on product consumption taxes. They can run down the discounted barrels bought before the crisis and supply the domestic product market. The majors, meanwhile, are optimising their crude book. Having been allowed to tap commercial stocks, they are reselling costlier West African and Guyanese cargoes into Europe while taking lower cost Russian and unsanctioned Iranian barrels. The March product ban, meanwhile, assured supply but left tanks brimming and margins negative. Domestic demand has also weakened. Beijing is now allowing targeted exports to “neighbours in distress” and reportedly preparing for broader export resumption in May of both products and chemicals. But just as the domestic market loosened, it could tighten once more. The independents are struggling to maintain runs and the majors are shifting back to chemicals, where domestic margins have improved.

An energy superpower

Despite the turbulence, the war is validating China’s energy security strategy and the assumptions underpinning its 15th Five Year Plan (FYP). The plan, drafted before the war, calls for more domestic production and storage (including critical minerals), highlights the Power of Siberia 2 pipeline, introduces peak oil and coal and encourages continued growth in wind and solar, alongside grid investment. The FYP is about resilience, self-reliance, supply- and fuel diversification as well as technological dominance. In short, China is looking to become an energy superpower. Some  additional coal will be tolerated, with coal to chemicals a clear winner. Yet recent policy statements reinforce Beijing’s commitments to decarbonisation. It will be hard to accelerate electrification and renewable deployment in the near term, given the dizzying pace of deployment in recent years and efforts to reform prices and curb overcapacity. But the direction of travel remains toward a cleaner, more electrified and slightly more cost-efficient system.

Geopolitically neutral with a touch of soft power

In its foreign engagements, Beijing is circumspect. Chinese diplomats have been working the phone lines, but top leaders are staying away from the Gulf. Asian and European leaders have travelled to Beijing seeking product exports and leaving with cleantech deals. Against that backdrop, both Washington and Beijing appear keen to keep the Trump trip on track. But can energy be a stabiliser? China is taking record volumes of US ethane and LPG while largely shunning crude and LNG and navigating sanctions on Iran. The visit, if it still goes ahead, will test how compartmentalised pragmatism can coexist with deepening strategic rivalry.

Source: OIES