Strategic reserve filling lifts Chinese oil demand
China is using the recent oil price decline to as an opportunity to accelerate filling its strategic petroleum reserve (SPR), providing a boost to the country's sluggish oil demand, analysts say
China's slowing economy has seen oil demand grow at less than 2% through the first nine months of this year, its lowest level since 1990. However, crude import growth is running at more than 8% higher than last year. China's opaque oil data makes it difficult to reconcile the disconnect, but the most likely explanation is that China is using a period of low prices to fill its expanding SPR system. Brent crude prices have fallen nearly 25% from $115 a barrel (b) in June to around $87/b as of 30 October.
The theory got some support with the release of China's September trade data. Total crude supply outpaced refinery throughputs, a proxy for actual consumption, by 665,000 barrels per day (b/d) in September, much higher than the 391,000 b/d average for the rest of the year, according to Platts. And there is evidence that buying spree has continued into October. Chinese oil traders reportedly bought a record 45 cargoes, more than 20 million barrels, of Dubai, Oman and Upper Zakum middle eastern crude grades in October. With the Atlantic Basin well supplied, Middle East and Latin American sellers have been competing fiercely to maintain market share in Asia, and many are offering discounts.
With little evidence of an increase in domestic oil demand growth amid China's economic slowdown, those extra barrels are likely going into the country's strategic stockpile. "China has in the past taken advantage of low oil prices to increase SPR fill. With the pull back in Brent to US$85/b and increased geopolitical tension in the Middle East, China is likely to be an opportunistic buyer of crude and imports are likely to accelerate," analysts at
Bernstein Research, an investment bank, said in a recent research note.
Bernstein reckons China had around 204 million barrels of crude in its SPR as of August 2014, 40m barrels more than the end of 2013, enough to cover around 34 days of imports, far fewer than developed countries typically. The country has rolled out its SPR system in phases, and phase 1, which had a total capacity of 100m barrels across four sites, was filled in 2009 following the steep decline in crude prices. It paid an average of $58/b to fill the phase 1 sites, according to Bernstein. Construction and filling of the phase 2 sites, which includes 9 facilities that have a total capacity of 226m barrels, started in 2010, though not all those sites are finished yet.
Bernstein says China's SPR is about 90% full, but new capacity is expected to be added in the coming months, and it expects the country to try and fill that capacity while prices are low. "We think China is likely to take advantage of the recent weak oil price and fill up the spare capacity which we estimate to be circa 30 million barrels as of the end of August, 2014. The country should also have two new SPR sites ready for filling in a few months time and boost total SPR capacity by 38m barrels to 269m barrels," the report says.
Bernstein also expects heightened concerns over energy security in Beijing to lead the country to continue expanding its SPR. The phase 3 and phase 4 SPR expansions, which are expected to be built in the country's interior provinces, could bring the systems total storage capacity to 714m barrels by 2020, equal to around 90 days of imports, the standard for developed nations.
That will make SPR additions an increasingly large share of China's overall oil demand, and an important contributor to global oil growth. Bernstein forecasts SPR filling will add 224,000 b/d of crude to China imports in 2015 and 125,000 b/d in 2016, accounting for more than 30% of demand growth through the end of the decade.
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