Low Crude Prices Not Necessarily Beneficial To China, an Industrial Info Market Brief

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The past few weeks have seen an unprecedented plunge in world crude prices, mainly due to the COVID-19 pandemic and a price war among the major producers. And while this leads many to believe that it is a good thing for China, a country that imports roughly 70% for its own domestic use, it is not necessarily so, as careful analysis would show.

Extreme low prices could trigger a financial crisis in China because it's trading in oil futures is reliant on "petro yuan," which is restricted by Shanghai trading regulations. It would also make China's own domestic oil exploration unprofitable given its own average production cost per barrel is higher than the trading price. In addition, China has limited capacity to store oil. Low prices could also wipe out profitability in the oil industry and cause the values of related stocks and bonds to evaporate. For the domestic Chinese consumers, they still pay the same amount for fuel due to a heavily regulated domestic retail market, regardless of plummeting world prices.

Hardest hit are the Shandong refineries, which are restricted by government-imposed quotas to import crude, and consequently, what they have refined for domestic use or for export.