China lets refiners cut output as Hormuz crisis removes 11M barrels

China's decision to let independent refiners cut output marks the first major demand-side response to a supply shock that has already removed more than 11 million barrels a day from global markets.

China's state planner allowed money-losing independent refiners to reduce output from June, a sign that the world's largest crude importer is struggling to absorb the supply disruption from the Strait of Hormuz closure. The National Development and Reform Commission authorized the cuts as processing margins turned negative for many smaller plants.

"The buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started," Chevron Chief Executive Officer Mike Wirth said at a recent industry conference.

More than 11 million barrels a day of Persian Gulf oil and condensate production — roughly 20% of global supply — is now inaccessible because of the waterway's closure, according to Wood Mackenzie. The world is burning through a record 8.7 million barrels a day from stockpiles, Goldman Sachs estimates, with total supply losses since the war began exceeding 1 billion barrels. US commercial crude inventories stood at 441.7 million barrels last week, about 2% below their five-year average, while the Strategic Petroleum Reserve has fallen to 365.1 million barrels from 415.4 million before the conflict.

ExxonMobil Senior Vice President Neil Chapman warned that global inventories are approaching "unheard of" levels and that physical Brent could spike to $150 to $160 a barrel within weeks once stockpiles hit historic lows. The International Energy Agency has identified July and August as the period when market conditions would become most acute, even after member countries released 400 million barrels of reserves in March.

Stockpiles Nearing the Danger Zone

The pace of inventory depletion has accelerated faster than most forecasters anticipated. US commercial crude inventories, which stood well above average before the war, have now fallen below their five-year seasonal norm. The SPR, already drawn down after record releases in 2022 following Russia's invasion of Ukraine, has limited remaining capacity to cushion further disruptions. "We're approaching unheard of inventory levels," Chapman said at the Bernstein conference in New York. "You can debate whether that's going to hit, those really low levels, in two weeks or three weeks. Once you get to that point, then you'll see the price shoot up."

Brent crude, which surged above $110 a barrel in mid-May before retreating to around $90 on hopes of a diplomatic resolution, remains up more than 50% this year. The recent price pullback reflected optimism that US-Iran talks could reopen the Strait of Hormuz, but those hopes dimmed after Tehran suspended negotiations and reiterated its determination to pursue a complete closure of the waterway. President Donald Trump said the US would maintain its blockade on Iranian ports while later claiming talks were continuing.

China's Teapots Feel the Squeeze

China's independent refiners have been among the first casualties of the supply crisis. Many operate on thin margins and lack the long-term supply contracts that shield state-owned giants such as Sinopec and PetroChina from spot market volatility. The NDRC's authorization to cut output provides a formal mechanism for reducing throughput, effectively allowing the market to self-correct rather than forcing the government to impose mandatory curbs.

The broader implication extends beyond China. If the world's largest crude importer is reducing processing rates, it signals demand destruction that could eventually cap price gains — but only after prices have risen enough to force consumption cuts. The IEA has warned that the current rate of stockpile drawdown is unsustainable, and that without a resolution to the Hormuz closure, the global economy faces a supply gap that emergency reserves alone cannot fill.

This article is for informational purposes only and does not constitute investment advice.