China’s refinery push reshapes oil outlook

China’s government has instructed domestic refiners to keep fuel and other refined-product output high while the conflict involving Iran continues to disrupt regional crude flows and shipping routes. The directive aims to ensure stable supplies of gasoline, diesel and other fuels even as transport risks and logistical bottlenecks persist around key Middle Eastern chokepoints.

This policy comes against the backdrop of weakening domestic fuel consumption. In May 2026, China’s oil use fell by about 1.5 million barrels per day, a decline of roughly 9 percent, contributing significantly to a broader demand slowdown across Asia. The combination of high refinery runs and softer local demand raises the prospect of more Chinese fuel being available for export into the regional market.

China’s state-owned refiners are considering resuming purchases of Iranian crude oil as they respond to evolving supply conditions during the Iran conflict. Any renewed inflows from Iran would add to the crude slate available to large Chinese processors already operating at elevated run rates under government instructions.

Industry sources indicate that several factors could limit the scale of these Iranian purchases. Competing alternative crude supplies remain available, and China’s weaker domestic fuel demand reduces the urgency to secure additional barrels. Together, these forces suggest that even if Iranian imports restart, they may not reach levels seen in earlier periods of stronger demand.

The International Energy Agency now expects global oil demand to decline by about 1 million barrels per day in 2026, marking the first annual contraction since 2020. The downturn reflects the impact of higher oil prices and supply disruptions linked to the U.S.-Iran conflict, which have weighed on consumption in several major importing regions.

In May 2026, global demand fell to 97.9 million barrels per day, with Asia recording the largest regional decrease. China’s sharp reduction in oil use was a central driver of this regional weakness. These figures underscore the extent to which slower activity in Asia is shaping the overall demand picture and influencing expectations for future crude balances.

While demand has softened in Asia, U.S. gasoline use increased in the second quarter of 2026. This rise occurred despite pump prices that were about 50 percent higher than prewar levels in May, highlighting a more resilient demand profile in the United States compared with Asia.

The divergence between declining Asian consumption and firm U.S. gasoline demand illustrates how regional economic conditions and consumer behavior are affecting the global oil market. It also complicates forecasting efforts, as refiners and producers must navigate weaker aggregate demand alongside pockets of relative strength in key end-use segments.

China’s decision to keep refinery output high, while contemplating additional Iranian crude purchases, intersects with the IEA’s forecast of falling global demand. Elevated Chinese product exports in a weakening demand environment could add to competitive pressure in regional fuel markets and influence trade flows across Asia.

At the same time, a fragile ceasefire has allowed some oil to move through the Strait of Hormuz, helping stabilize prices despite ongoing geopolitical risks. As supply routes partially normalize and demand expectations edge lower, the balance between China’s refining policy, Iranian export potential, and shifting consumption patterns will remain a key driver for global oil dynamics in 2026.