At Today’s Lower Prices China is Adding 70-90 MMBoe to SPR with Strategic Crude Oil Purchases

Simultaneously to the Peoples Bank of China intentionally depreciating the Yuan last week, China’s National Energy Administration announced on May 31, 2016 that the country is planning to implement changes to how oil reserves are handled. Private companies will be engaged to build and operate some of the strategic stockpiles. The change would also require companies to maintain compulsory inventories, potentially boosting imports for the short term.

The stocks amassed by the private companies would necessitate separate storage from commercial reserves. The use of these reserves would be at the discretion of the state council of cabinet.

By mid-2015, China had stockpiled about 190.5 million barrels under its SPR program, or roughly one month of net crude imports. Beijing’s goal is to stockpile reserves amounting to 90 days of net imports, which is the standard for strategic petroleum reserves (SPR) in most western countries.

Low oil prices have been a plus for China as they look to build their SPR to higher levels on cheap crude. China is expected to add 70-90 million barrels to its strategic crude oil purchases in 2016 to take advantage of the low prices.

Circumstances under which the reserves may be used include during an unexpected emergency when oil supplies are either blocked or significantly reduced, or when macro-economic adjustments are needed.

China Strategic Petroleum Reserves

One driver of global oil demand has been China’s initiative to build its strategic petroleum reserves. China has long been concerned about the security of its oil supply. In the 1980’s and 90’s, China was a net oil exporter of oil. As the Chinese economy took off and began its rapid growth, oil consumption grew along with it. China is now the second largest oil consumer in the world, and is neck and neck with the U.S. as the largest oil importer in the world. Of course, the increase in domestic U.S. oil production, providing for greater American energy self-sufficiency, certainly played a role in allowing exporting nations to divert shipments to China without pushing up crude prices.

China’s oil imports have continued to climb as consumption increases. In 2000, China relied on imports to meet 30% of its needs, but that dependency swelled to 57% in 2014. Although monthly figures fluctuate, China’s level of imports is at an all-time high. With another storage facility opening up later this year as part of the SPR, oil imports could continue to rise.

china

Energy security is a source of anxiety among Chinese authorities, and building up its strategic petroleum reserve (SPR) has been a high priority for China in reducing that nation’s vulnerability to imports. It has a goal of filling up its reserve with 500 million barrels by 2020. By way of comparison, the U.S. SPR holds 695 million barrels. As China has moved onto the newest phase of its stockpile build – filling the new Aoshan island SPR – oil imports are particularly elevated, hitting 7.9 million barrels per day (MMBoe/d) in April 2016. Which only slightly trails the 8.02 MMBoe/d, when oil prices initially started trending upward.

Another way that China has tried to secure oil supplies is by locking up supply contracts with as many oil producing countries as possible. The vast majority of China’s imports come from the Middle East and Africa.

The Sustainability of Demand

Oil and gas veterans have watched closely as the supply balance around the globe has been monitored to gauge the demand and supply balance relative to the ‘oil glut’. China’s increased appetite for oil has had an influence on these numbers as the world comes closer to a supply balance. The question becomes whether or not Chinese supply will hold stable at these elevated numbers?

Chinese initiatives to drive SPRs higher would imply that the demand will continue to exist for the foreseeable future. Chines oil imports and consumption has been on the rise in coalition with GDP growth. However, the much publicized slowing of the Chinese economy could curtail this effect

The potential for a slowdown could be on the horizon according to an article from Reuters: “According to Shandong Dongming Petrochemical, the largest independent refinery in China, ports are congested.  China still has a lot of building to do, especially when it comes to energy infrastructure. The lack of pipeline capacities and storage at China’s refineries puts a cap on demand. Independent refineries like Shandong have become large drivers of demand ever since they were granted licenses to import last year.  More than one million barrels of refinery capacity per day are scheduled for maintenance by PetroChina and Sinopec in May, which means they will be shut down, putting the brakes on demand at the independents, known as ‘teapots’.”

The drive for increased imports by China has buoyed oil prices in recent months in an effort to build SPR at low oil prices. If the demand continued and even grows, oil price could continue to climb as many other fundamental factors align with a price appreciation. However, should something curtail the demand in China, oil price could be in for a wild ride.


Legal Notice