China's Refinery Throughput Drop May Tighten ULSD Supply Even as Demand Falls
Chinese crude imports have collapsed and refinery runs are at a near four-year low, leaving the global distillate supply picture murkier than the demand data alone suggests.
NYMEX heating oil front-month was trading at $4.25 a gallon on Thursday (2026-08-27), near the low end of its recent range, after crude markets sold off sharply earlier in the week. NYMEX WTI front-month dropped 2.4% on Monday (2026-08-24), when US Treasury Secretary Scott Bessent announced what he called an "unprecedented" campaign to economically isolate Iran. ICE Brent crude front-month fell more than 1% to around $93 a barrel on Monday (2026-08-24), Blockonomi reported, and had slid further to $89.76 by Thursday (2026-08-27).6,5
The short case on distillates has plenty of data behind it. Gasoline sales at Sinopec, China's largest refiner and fuel retailer, dropped 8% year on year in April while diesel fell 6%, Reuters reported. Goldman Sachs estimated consumption of gasoline and related products may have declined by as much as 20%. China's crude imports plunged 29% in May to 7.8 million barrels a day, the lowest in eight years, after shipments from the Persian Gulf nearly stopped.2
It did not improve in June. Chinese crude imports fell 41% to 29.27 million tons, or 7.2 million barrels a day, a near-decade low, Business Standard reported. Refining volumes in May dropped 9.1% year on year to 53.72 million tons, the weakest level since August 2022, according to Rigzone. These numbers reinforce the bearish consensus.4,3
But two aspects of this picture deserve closer attention from ULSD traders.
China's demand decline is not uniform across the barrel. EV charging volumes surged 69% from a year earlier to a record high in April, the China Charging Alliance reported, and rail travel rose roughly 10% in March and April. Those substitutions eat into gasoline and jet demand more directly than they affect diesel and heating oil, which track industrial freight and heating load rather than passenger transport. A market treating all Chinese demand weakness as equivalent across product types may be overstating the distillate-specific damage.2
The supply side argument is more immediate. China's independent teapot refiners have accounted for approximately 90% of all Iranian crude exports in recent years, according to oilprice.com. In early June (2026-06-08), Chinese buyers were already being offered Iranian crude at discounts to Brent, having paid a premium in May, as teapot margins collapsed under soaring input costs.1
Bessent's sanctions campaign targets this supply chain directly. If enforcement constrains Iranian crude reaching Chinese ports, the teapots lose their main feedstock source. Chinese refinery runs were already at a near four-year low entering summer; a further feedstock squeeze would cut throughput and shrink middle distillate output from those facilities. That would be a supply-side contraction operating in parallel with, and potentially outweighing, the demand weakness the market is pricing.3,6
Tehran's decision to allow select Iraqi oil tankers to transit the Strait of Hormuz on Monday (2026-08-24) after diplomatic contacts showed some flexibility remains, Blockonomi reported. But that does not guarantee Iranian crude will continue reaching teapot refineries under the new sanctions architecture Bessent outlined.5
Mirae Asset's Mohammed Imran said on July 31 (2026-07-31) that Hormuz disruption sustained into mid-September could push ICE Brent crude front-month to average $90 by year-end, Business Standard reported. Brent was already at $89.76 on Thursday (2026-08-27), which narrows the gap between current levels and that stress scenario considerably.4
The test for the contrarian view on ULSD will come with Chinese crude import data for July and August, expected in the coming weeks. A third consecutive collapse in volumes, combined with evidence that Iranian crude shipments to teapot facilities are thinning under the new sanctions pressure, would signal that the supply side of the distillate equation is contracting faster than demand — a very different setup than the straightforward demand-destruction trade currently dominant in the market.1,3