Can China鈥檚 strategic petroleum reserve rescue oil markets?
In a bid to fill its SPR, China is increasing its crude imports. But can it help bolster struggling oil markets?
A worker walks down the stairs of an oil tank at a refinery in Wuhan, Hubei province, in this March 23, 2012 file photo. As China closes in on the U.S. as the world's biggest crude oil importer, demand from private refiners and stockpiling of cheap oil is expected to keep imports at record levels after a wobble in the third quarter of 2015.
Stringer/Reuters/File
China鈥檚 imports of crude oil are picking up after a lackluster third quarter.
搁别耻迟别谤蝉听听that China has increased permits for small refiners, allowing an extra 700,000 barrels per day of crude imports since July. That equates to around 10 percent of China鈥檚 total import levels. Reuters says that China is increasing purchases of crude from the North Sea, Angola, and Russia.
And it鈥檚 not just for refining. Much of the increase is motivated by China鈥檚 push to fill up its strategic petroleum reserve (SPR). China鈥檚 SPR is being constructed in several phases, with the goal of eventually听. By way of comparison, the massive SPR controlled by the U.S. holds over 700 million barrels.
The first round of storage is already complete in China, with a capacity of around 103 million barrels. Phase 2 of the SPR is currently under construction and expected to be completed by the end of 2015, adding capacity of听听across nearly a dozen sites. Some of them are already finished, others will come online soon.
With some of these new sites coming online, China is accelerating its oil imports.
鈥淒espite a slowing Chinese economy, crude imports remain robust on the back of accelerated stockpiling activities into operating and commercial storage,鈥� Wendy Yong, an analyst at the consultancy FGE, told Reuters.
China鈥檚 imports could jump by 12 percent in the second half of 2015, compared to the first half, according to FGE. 鈥淢oving into 2016, crude imports are expected to pick up with the commissioning of a few major SPRs, though overall growth could ease to 5 percent from a stronger base amidst softer growth pace in crude runs,鈥� Yong added.
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China鈥檚 increased level of imports puts it nearly on par with the U.S. in terms of absolute volume of crude imports. The U.S. imports around 7.3 million barrels per day (mb/d), and although China鈥檚 imports fluctuate, its import demand is only around 0.5 mb/d less than that.
The move to fill new SPR storage facilities is providing a bit of a lift to global demand. Between January and June, China鈥檚 SPR campaign added 0.5 mb/d to global demand above its normal consumption rate. 鈥淚t throws a lifeline to the market鈥� Jeff Currie, a top commodities researcher at Goldman Sachs told听听in September. 鈥淭hat lifeline lasts through late 2016.鈥�
Although China鈥檚 economy exhibited some very worrying signs over the summer, with a stock market meltdown and slowing GDP growth, its oil demand remains robust, at least for now. The IEA听听that China posted a 0.6 mb/d annual demand growth rate in the 3rd quarter, or as the Paris-based energy watchdog put it, China accounts 鈥渇or roughly one-out-of-every-three-extra barrels of oil delivered globally.鈥�
Still, although different analysts see different time horizons, China鈥檚 demand for oil will most likely slow at some point next year. The demand to fill the SPR can only be temporary. And in any case, the additional demand is not enough to soak up the supply overhang that currently exists in the market.
In fact, some analysts are growing听听that there is a larger downside risk to oil prices that few people are paying attention to. Just as the markets bid up the price of oil in the spring of 2015 on the expectation of a turnaround, the latest rally could also be premature. Oil has already dropped back and given up all the ground that it had gained in early October.
Some of the gloomiest analysts think that oil prices could dip below $30 per barrel once the markets realize that demand may not be able to rescue the glut of supply. 鈥淚 think there is a 30% probability to even go down to $25 in the next 10 months, as storage capacity gets filled and demand will keep on being revised down,鈥� Pierre Andurand, an energy trader, told听. To punctuate his point, the EIA鈥檚听听shows a huge uptick in crude oil storage levels in the U.S., illustrating the ongoing glut. Oil inventories surged by 7.6 million barrels last week.
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