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Why China is stockpiling huge amounts of oil at a record pace
Ambrose Evans-Pritchard, The Telegraph | May 21, 2014 | Last Updated: May 21 11:21 AM ET
China has daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. Above, this picture taken from a Vietnam Coast Guard ship on May 14, 2014 shows a Vietnamese Coast Guard officer taking picture of a China Coast Guard ship moving toward the Vietnamese ship near to the site of a Chinese drilling oil rig (R, background) being installed at the disputed water in the South China Sea off Vietnam's central coast.
HOANG DINH NAM/AFP/Getty Images
China has daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. Above, this picture taken from a Vietnam Coast Guard ship on May 14, 2014 shows a Vietnamese Coast Guard officer taking picture of a China Coast Guard ship moving toward the Vietnamese ship near to the site of a Chinese drilling oil rig (R, background) being installed at the disputed water in the South China Sea off Vietnam's central coast.
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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.
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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 per day (bpd) 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 bpd 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 40% 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.
It’s very similar to what they have been doing with copper
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 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 U.S. keeps adding supplies of shale.
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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.
John Mitchell, from Chatham House, says China has stocks to cover 46 days of imports compared with 209 for the U.S., based on estimates from last year. India is acutely vulnerable to any disruption with just 12 days cover. The minimum safe threshold for OECD states is deemed to be 90 days.
Chinese officials are increasingly nervous as the country’s import dependency keeps climbing, reaching the 60% level this year. This is deemed to be the danger line. Planners have been studying closely what would happen in a global conflict such as full-blown Mid-East war or closure of the Straits of Hormuz. East Asia is now far more vulnerable to Mid-East oil disruptions than the U.S.
China’s stock-build comes as the West steps up threats of “Stage 3? sanctions against Russia, to be triggered if the Kremlin continues to disrupt the Ukrainian elections through paramilitary proxies in the Donbass region.
Sources in Washington say the U.S. may include Russian oil companies such as Rosneft among the targets. This is thought less disruptive for European allies than quarantine measures against the gas monopoly Gazprom since gas is mostly supplied by pipeline contracts and is much harder to replace.
The US has already sanctioned Rosneft’s chairman Igor Sechin, the chief architect of the Kremlin’s energy policy over the last decade.
Mr Lewis said any move against the energy industry would risk a disruption of physical trading in oil since most banks would be unwilling to handle the transactions. “It would effectively tighten supply and be bullish for crude prices,” he said.
A parallel drama is unfolding in South East Asia where China is building what appears to be an air base on the Johnson Reef just off the Philippine coast. China is also at daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. This has erupted in a wave of anti-Chinese violence over recent days, with an estimated 20 people killed in Vietnamese cities, prompting China to evacuate 3,000 of its citizens from the country.
There is the risk of a dangerous tit-for-tat spiral. The Chinese media has been calling for action to “teach Vietnam a lesson”, echoing the language of Chinese leader Deng Xiaoping before he launched an attack on Vietnam in the disastrous war of 1979.
Oil experts says there is no sign yet that China is hoarding diesel or boosting output of refined products such as jet fuel, the sort of indicators that might point to preparations for possible conflict.
China’s oil imports in April mostly came from Russia, Angola and Iraq. The IEA said there were also 615,000 bpd of shipments from Iran, a huge increase that underscores just how far global sanctions have eroded since Iran’s new leader, Hassan Rouhani, reached a preliminary deal with the major powers over the country’s nuclear programme.
The Daily Telegraph
http://business.financialpost.com/2014/05/21/why-china-is-stockpiling-huge-amounts-of-oil-at-a-record-pace/?__lsa=7baa-da52
Ambrose Evans-Pritchard, The Telegraph | May 21, 2014 | Last Updated: May 21 11:21 AM ET
China has daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. Above, this picture taken from a Vietnam Coast Guard ship on May 14, 2014 shows a Vietnamese Coast Guard officer taking picture of a China Coast Guard ship moving toward the Vietnamese ship near to the site of a Chinese drilling oil rig (R, background) being installed at the disputed water in the South China Sea off Vietnam's central coast.
HOANG DINH NAM/AFP/Getty Images
China has daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. Above, this picture taken from a Vietnam Coast Guard ship on May 14, 2014 shows a Vietnamese Coast Guard officer taking picture of a China Coast Guard ship moving toward the Vietnamese ship near to the site of a Chinese drilling oil rig (R, background) being installed at the disputed water in the South China Sea off Vietnam's central coast.
Twitter Google+ LinkedIn Email Comments More
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.
Harper’s petro-folly: How Canada fumbled its post-Keystone energy vision of a gateway to China
This is the story of how Canada’s Plan B rejoinder to Obama’s repeated Keystone delays became mired down, jeopardizing future oil-sands development and production at a cost, according to a Calgary research group, of more than $400 billion in lost economic growth over the next 25 years. Keep reading.
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 per day (bpd) 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 bpd 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 40% 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.
It’s very similar to what they have been doing with copper
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 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 U.S. keeps adding supplies of shale.
Related
China is about to become the world’s biggest economy — even though people thought this was years away
China’s lending bubble could threaten U.S. and global economies if not defused
Why China’s market is important despite poor performance
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.
John Mitchell, from Chatham House, says China has stocks to cover 46 days of imports compared with 209 for the U.S., based on estimates from last year. India is acutely vulnerable to any disruption with just 12 days cover. The minimum safe threshold for OECD states is deemed to be 90 days.
Chinese officials are increasingly nervous as the country’s import dependency keeps climbing, reaching the 60% level this year. This is deemed to be the danger line. Planners have been studying closely what would happen in a global conflict such as full-blown Mid-East war or closure of the Straits of Hormuz. East Asia is now far more vulnerable to Mid-East oil disruptions than the U.S.
China’s stock-build comes as the West steps up threats of “Stage 3? sanctions against Russia, to be triggered if the Kremlin continues to disrupt the Ukrainian elections through paramilitary proxies in the Donbass region.
Sources in Washington say the U.S. may include Russian oil companies such as Rosneft among the targets. This is thought less disruptive for European allies than quarantine measures against the gas monopoly Gazprom since gas is mostly supplied by pipeline contracts and is much harder to replace.
The US has already sanctioned Rosneft’s chairman Igor Sechin, the chief architect of the Kremlin’s energy policy over the last decade.
Mr Lewis said any move against the energy industry would risk a disruption of physical trading in oil since most banks would be unwilling to handle the transactions. “It would effectively tighten supply and be bullish for crude prices,” he said.
A parallel drama is unfolding in South East Asia where China is building what appears to be an air base on the Johnson Reef just off the Philippine coast. China is also at daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. This has erupted in a wave of anti-Chinese violence over recent days, with an estimated 20 people killed in Vietnamese cities, prompting China to evacuate 3,000 of its citizens from the country.
There is the risk of a dangerous tit-for-tat spiral. The Chinese media has been calling for action to “teach Vietnam a lesson”, echoing the language of Chinese leader Deng Xiaoping before he launched an attack on Vietnam in the disastrous war of 1979.
Oil experts says there is no sign yet that China is hoarding diesel or boosting output of refined products such as jet fuel, the sort of indicators that might point to preparations for possible conflict.
China’s oil imports in April mostly came from Russia, Angola and Iraq. The IEA said there were also 615,000 bpd of shipments from Iran, a huge increase that underscores just how far global sanctions have eroded since Iran’s new leader, Hassan Rouhani, reached a preliminary deal with the major powers over the country’s nuclear programme.
The Daily Telegraph
http://business.financialpost.com/2014/05/21/why-china-is-stockpiling-huge-amounts-of-oil-at-a-record-pace/?__lsa=7baa-da52
