China's stockpiling keeping crude above US$100

Record imports in April highlights efforts to create a strategic reserve against backdrop of supply risks and regional disputes, analysts say

PUBLISHED : Wednesday, 11 June, 2014, 1:58pm
UPDATED : Thursday, 12 June, 2014, 4:28am

China is hoarding crude at the fastest pace in at least a decade, shielding itself from supply disruptions and helping keep prices above US$100 a barrel.

The country imported a record volume in April as it emulates steps taken by the United States in the 1970s to create a strategic petroleum reserve, government data shows.

President Xi Jinping is building stockpiles as China clashes with Vietnam over resources in the South China Sea and faces potential risks to oil sales from Russia, Africa and the Middle East because of sanctions and violence.

The purchases are helping to drive oil prices higher, according to analysts at Barclays, Citigroup and Nomura.

As China's thirst for crude grows with the expansion of its emergency stockpiles and refining, the International Energy Agency estimates that it will surpass the US as the world's largest oil consumer by 2030.

"This panicked stockpiling is one of the ways that geopolitical tensions can actually tighten physical oil markets," Seth Kleinman, a London-based analyst at Citigroup, said.

"This buying spree is partly driven by the infrastructure needs of China's ongoing refinery expansion but also reflects the rise in geopolitical tensions."

West Texas Intermediate crude, the US benchmark, gained about 9 per cent over the past year to US$104.35 a barrel on the New York Mercantile Exchange, while Brent crude, the marker for more than half the world's oil, climbed about 5 per cent to US$109.52 on the London-based ICE Futures Europe exchange.

China bought more than 600,000 barrels a day of surplus crude from January to April, a record for that time of the year based on data from Chinese statistics tracked since 2004. The surplus supplies are calculated by subtracting refinery runs from the combined total of net imports and domestic production.

The imports suggest a "significant" rise in commercial and emergency stockpiles, according to the IEA, an adviser to 29 of the most industrialised nations on energy policy.

The website of China's Centre for Oil Reserves has a short description of the office, a branch of the National Energy Administration, but no information about the level of the reserves.

The world's second-largest economy, which gets more than half its crude from overseas, plans to build emergency reserves equal to 100 days of net imports by 2020, China Petrochemical Corp, the country's top refiner, said in 2009, citing a plan approved by the State Council. That volume is equal to more than 680 million barrels based on April's customs figures, compared with 349 million in 2008.

According to the US Energy Information Administration, officials decided in China's 10th five-year plan, which covered 2000 to 2005, to establish a government-administered strategic oil reserve to help shield the country from potential supply disruptions.

China had 141 million barrels of strategic reserve capacity at the end of last year, China National Petroleum Corp, the country's top energy producer, said in an annual report released in January.

Crude production from the Middle East and North Africa has been curtailed by a battle for political control in Libya, pipeline attacks in Iraq and prolonged sanctions against Iran. Russia's conflict with Ukraine has also stoked fears of a disruption of supplies from the world's largest energy exporter.

China is building reserves while it hunts for future resources. Its claims in the South China Sea have put it at odds with neighbouring Vietnam and the Philippines, which are also exploring for oil and gas in the disputed waters.

"The escalating maritime tensions in offshore China also call for accelerated strategic oil reserves stockpiling," said Gordon Kwan, regional head of oil and gas research at Nomura.