China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market.
The move comes as tensions mount in the South China Sea, and the West prepares possible oil sanctions against Russia over the crisis in Eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply.
The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels a day in April, an all-time high. This is raising eyebrows since China’s economy has been slowing for months, with slump conditions in the steel industry and a sharp downturn in new construction.
The agency estimates that 1.4m b/d was funnelled into China’s fast-expanding network of storage facilities, deeming it “an unprecedented build”. Shipments were heavily concentrated at Chinese ports nearest the new reserve basins at Tianjin and Huangdao. “We think this is a big deal,” said one official.
China accounts for 40pc of all growth in world oil demand, so any serious boost to its strategic reserves tightens the global supply almost instantly and pushes up the spot price.
Michael Lewis, head of commodities at Deutsche Bank, said Chinese officials at Beijing's Strategic Reserve Bureau are playing the oil market tactically, or “buying the dips” in trader parlance. They add to stocks whenever Brent crude prices fall to key support lines, as occurred earlier this Spring. This is currently around $105.
“It's is very similar to what they have been doing with copper. Whenever it drops below $7,000 (a tonne), they see it as a buying opportunity. They do the same with agricultural commodities,” he said.
China is putting a floor of sorts underneath the global oil market, calling into question predictions by the big oil trading banks that prices will deflate this year as more crude comes on stream from Libya, Iraq, and Iran, and as the US keeps adding supply shale.
The strategic buying could go on for a long time since China is rapidly expanding its reserve capacity from 160m barrels to 500m by 2020, with sites scattered across the country.
Here is the Daily Telegraph article.
At the moment, Brent crude is trading quietly in an increasingly narrow range and WTI crude has a similar pattern. These sorts of patterns in any instrument, let along the world’s most important commodity, can lull one into a false sense of security. However, they are usually resolved by sudden, sharp breakouts.
If so for crude oil in this instance, in which direction will that breakout occur? One can only guess but if China really is determined to increase its stockpile of crude oil to the extent mentioned above, that helps to limit downside scope. Also, global tensions in Eastern Europe and the South China Sea region are clearly higher than a year ago. However, it would not be in China’s oil stockpiling interests to be extending its recent aggressive action off Vietnam’s coast.
See also this article from CNN: How an oil rig sparked anti-China riots in Vietnam.
Lastly, big Western oil shares from Exxon and Chevron to Royal Dutch Shell B and BP do not look as if they are anticipating an imminent slide in oil prices. However, we also know that they are often cyclical late movers in stock market bull trends.Back to top