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China is stockpiling cheap crude in reserves

The country has a long way to go to reach its 2020 Strategic Petroleum Reserve target

There is little doubt that China has used the steep drop in the oil price to accelerate the filling of its Strategic Petroleum Reserve (SPR), a stockpile of crude set aside to help them ride out disasters or war. 

But putting a figure on exactly how much oil is in the SPR is notoriously difficult. Unlike other countries, Beijing considers its SPR a state secret and rarely discusses it.

The government has said that it aims to hold the equivalent of 90 days of net imports, the standard for International Energy Agency member countries, by 2020. Assuming imports rise to around 8m barrels per day (b/d) by that time, the country would need an SPR holding of around 700m barrels to reach the target.

It has a long way to go. In November last year, the government acknowledged, for the first time, that the first phase of the SPR, holding around 100m barrels at four sites along the east coast, was complete. Analysts suspect that it had mostly been filled by 2009, the last time that oil prices plunged. 

The government appears to be using the most recent price decline to pour more cheap crude into the SPR’s second phase. In October, analysts at Bernstein estimated the SPR held 215m barrels. By the end of March, they estimate 58m barrels had been added, bringing the total to 273m barrels. And there is consensus among analysts around that figure. It implies that China has spent around $4bn over the past five months filling the SPR, at a rate of about 380,000 b/d – a staggering number that would undermine broader claims in the market of a global recovery in consumption.

If China is going to hit its 2020 target, it will have to speed up the construction of new storage facilities, which typically take around 18 months to build. Bernstein estimates that China will have around 315m barrels of SPR capacity by the end of this year, implying that China would need to add an extra 400m barrels, or 220,000 b/d, from 2016 to 2020. 

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