Good chance for China to increase strategic crude reserves amid bargain price environment
While oil price plunges will impact the global economy, which is already reeling from the coronavirus pandemic, China－the world's top crude importer－is likely to boost its oil reserves amid the bargain price environment, said insiders.
It's a good opportunity for China to top up its strategic crude reserve as its reliance on imported crude has been increasing from year to year, said Li Li, research director at energy consulting company ICIS China.
China, the world's largest oil and gas importer and second largest oil and gas consumer, should take advantage of the crude oil price crash and further secure a stable oil supply, Li said.
She suggested this would help with the country's energy security.
The General Administration of Customs said China's crude oil imports exceeded 500 million metric tons in 2019, up 9.5 percent year-on-year. Its foreign crude oil dependence rate was as high as 72.4 percent last year, it said.
On the other hand, the country had around 80 days of oil in storage, including that in its strategic petroleum reserve, oil storage at oil firms and commercial stocks, according to a news conference held by the National Energy Administration in September. It was below the 90 days recommended by the International Energy Agency.
In 2007, China announced an expansion of its crude reserves into a two-part system that consists of a government-controlled strategic petroleum reserve complemented by a mandated commercial reserve. China is now in phase 3 of filling its SPR at multiple coastal sites.
Luo Zuoxian, head of the intelligence research department under the Sinopec Economics and Development Research Institute, said it is an opportune time to increase crude imports and seize the opportunity offered by low prices while also enhancing its anti-risk capacity in terms of its petroleum reserve.
"China could take advantage of the lower crude prices to start filling in its SPR, as the country is still shy of its target of 900 million barrels, equivalent to 90 days of the country's net imports," Luo said.
Though crude prices have crashed by more than 30 percent in recent months, every dollar per barrel drop in crude prices reduces China's oil import bill, he added.
China has been stepping up efforts in oil and gas exploration and production－as well as reserve construction－to ensure energy security.
Even though the cost of domestic oil exploration and production is high compared with some other oil rich countries worldwide, government support will continue as part of its effort to ensure sufficient supply.
China's crude oil output grew 0.8 percent year-on-year to 190 million tons last year, snapping the declining trend since 2016, said the National Bureau of Statistics. About 650 million tons of crude oil were processed in 2019, up 7.6 percent year-on-year, while the country aims to increase its annual domestic crude oil output to more than 200 million tons this year, said the bureau.
Luo said the government should take advantage of low crude prices to continuously expand oil reserve construction, encourage commercial reserves and further boost crude imports. He also emphasized the need to tackle excess domestic production capacity and improve the quality of products.
Some experts also warn that a sharp decline in both consumer and business demand for oil due to the impact of the novel coronavirus pandemic and a lack of adequate storage facilities may limit China's willingness and ability to significantly boost its reserves.
While it might be a good opportunity to buy larger amounts at current prices, it still depends on costs and market conditions, said Tang Sisi, an analyst at research firm BloombergNEF.
Tang said that despite the uncertainties of the contagion's impact on refined oil products, low crude prices will help increase gross margins among domestic refiners. However, the growth of China's overall imports depends on storage availability and the recovery of fuel demand.
Li from ICIS agreed, saying that with softening domestic crude demand and China's potential purchase of more US oil as part of their bilateral trade deal, there could be some structural changes in China's crude purchase.
S&P Global Platts Analytics adjusted its 2020 global oil demand growth outlook down to 860,000 barrels per day, marking the weakest forecast since 2011. Asian refined products demand is expected to grow by 380,000 bpd in 2020, "posting its weakest growth since the global financial crisis in 2009", Platts said.
Considering the recently agreedupon reduction in global output in the current quarter, which is expected to continue over the upcoming 24 months, oil prices are unlikely to fall below $10 a barrel, Li said.
She said containment of the contagion's spread could help prop up oil prices. Otherwise, the pandemic might continue causing demand for jet fuel, gasoline and diesel to crash.
Nelson Wang, executive director of CICC research, said oil prices are expected to remain low for a bit longer, at least until the next OPEC meeting scheduled for June.
Wang also suggested China might take advantage of lower crude prices to exercise opportunistic buying and fill up its strategic petroleum reserve.
Global oil demand has dropped by as much as 30 percent, or about 30 million bpd, as measures to reduce the virus' spread have caused demand for jet fuel, gasoline and diesel to crash.
The slowing global economic growth and the ever-maturing new energy market have also contributed to oil price weakness, said Wang Li, a researcher at the Chinese Academy of International Trade and Economic Cooperation, adding the extremely low price of $30 per barrel or less will not last long, and prices are expected to gradually rebound in the near future.
Source:Chinadaily
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