GL&OilChem: Middle East conflict raises logistics and cost risks for China's oil and petrochemical market

Escalating tensions in the Middle East following the joint U.S.-Israel strikes on Iran have triggered one of the most serious disruptions to regional oil logistics in recent years. Tehran's declaration of a closure of the Strait of Hormuz, combined with the suspension of war-risk insurance and rising tanker freight rates, has sharply increased uncertainty across global energy markets.

For China, the world's largest crude importer, the immediate question is whether such a disruption could translate into physical supply shortages.
Current market conditions suggest that short-term supply security remains relatively stable, though the risks lie elsewhere.

The deeper implications may emerge through logistics disruptions, cost transmission across the supply chain, and potential shifts in global oil trade structures.

1. Short-term market impact: logistics disruption rather than supply shortage

Despite the geopolitical shock, China's crude supply position remains buffered by high inventories and elevated crude arrivals scheduled in the near term. Commercial stock levels at major ports have remained elevated in early 2026, while crude shipments scheduled to arrive in China have surged ahead of the conflict escalation.

At the refinery level, independent refiners in Shandong have also accumulated sizeable crude inventories following strong import inflows earlier in the year. Meanwhile, China's domestic gasoline and diesel demand has remained subdued after the Chinese New Year holiday period (Feb 14-23, 2026).

Under these conditions, the immediate constraint is not physical crude availability but rapidly rising logistics costs and insurance uncertainty.

Freight rates on the Middle East-China VLCC route have surged to levels several times higher than those seen at the start of the year, while war-risk insurance withdrawals have further increased the cost of transporting crude through the Persian Gulf.

2. Price reactions without demand recovery

The conflict has already triggered a short-term rally in China's refined product prices and trading activity. Refineries moved quickly to adjust wholesale gasoline and diesel prices in response to rising crude costs.

However, this price movement has not yet translated into higher refinery operating rates.

Sluggish end-use demand continues to constrain throughput decisions, particularly among independent refiners whose margins remain under pressure.

3. Structural implications: geopolitical risk and China's energy transition

Beyond the immediate market reaction, the conflict highlights a broader strategic vulnerability associated with heavy reliance on imported oil transported through geopolitically sensitive routes.

In this sense, geopolitical disruptions may act less as a short-term supply shock and more as a long-term catalyst for structural energy transformation.

4. The Strait of Hormuz remains critical for China

While crude oil supply risks appear manageable in the near term, the Strait of Hormuz remains a critical artery for several energy commodities imported by China.

Beyond crude itself, flows of LPG, LNG, fuel oil and methanol also rely heavily on Gulf shipping routes. Some of these products - particularly methanol - play key roles in China's petrochemical value chain and are more difficult to buffer through stockpiling.

Disruptions to these feedstocks could therefore transmit shocks into downstream industries, including plastics and synthetic fibre production.

Three possible market scenarios

The future trajectory of the conflict will ultimately determine its impact on global oil markets and China's energy system.

Possible outcomes range from a relatively rapid political stabilization, which are likely to allow oil flows through the Strait of Hormuz to normalize, to a prolonged period of partial disruption with persistently elevated freight and insurance costs. In a more extreme scenario involving broader regional instability, global supply disruptions are projected to become structural rather than temporary.

Each of these scenarios carries different implications for oil prices, trade flows and China's refining sector.

This article presents selected highlights from GL Consulting's report, China Policy Perspective Spotlight: How the U.S.-Israel-Iran Conflict Is Reshaping China's Crude Market.

The full report provides a more detailed assessment of oil price scenarios, supply chain disruption pathways, refinery margin implications, and the broader geopolitical strategy landscape.

For the complete analysis and detailed data tables, please contact: glconsulting@mysteel.com