June 11 (Bloomberg) — China is hoarding crude at the fastest pace in at least a decade, shielding itself from supply disruptions and helping keep prices above $100 a barrel.
The country imported a record volume in April as it emulates steps taken by the U.S. in the 1970s to create a strategic petroleum reserve, government data show. Chinese President Xi Jinping is building stockpiles as his nation 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 drive oil prices higher, according to Barclays Plc, Citigroup Inc. and Nomura Holdings Inc. As China’s thirst for crude grows with the expansion of its emergency stockpiles and refining, the International Energy Agency estimates that the Asian nation is poised to surpass the U.S. 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 yesterday by e-mail. “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 U.S. benchmark, gained about 9 percent over the past year to $104.35 a barrel on the New York Mercantile Exchange as of yesterday. Brent, the marker for more than half the world’s oil, climbed about 5 percent to $109.52 a barrel on the London-based ICE Futures Europe exchange over the same period and was at $110.09 at 10:56 a.m. London time today.
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 compiled by Bloomberg 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 industrialized nations on energy policy.
The buying “would benefit energy security not just in China but globally and crude imports of that scale might also support oil markets and keep commercial stocks from rising further elsewhere,” the Paris-based agency said in its monthly market report released May 15.
China doesn’t announce when it fills the emergency reserve and stockpile totals are not made public.
“There’s no official record,” Shi Qi, an analyst with CEBM Group, said by phone May 23. “Actual filling progress of China’s strategic oil reserves is in a black box.”
The official website of China’s Center for Oil Reserves has a two-paragraph description of the office, a branch of the National Energy Administration, though no information about the level of the reserves themselves.
A spokesman for the National Development and Reform Commission, the country’s top planning agency, declined to comment when contacted today by phone. He asked not to be identified because of internal policy.
The world’s second-largest economy, which gets more than half of its crude from overseas, plans to build emergency reserves equivalent to 100 days of net imports by 2020, China Petrochemical Corp., the nation’s top refiner, said in 2009, citing the plan approved by the State Council.
That volume is equal to more than 680 million barrels based on April’s customs figures, compared with the equivalent of 349 million in 2008.
According to the U.S. 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 nation from potential supply disruptions.
The country had 141 million barrels of strategic reserve capacity at the end of last year, China National Petroleum Corp., the nation’s top energy producer, said in an annual report released in January. China finished building four sites in 2009 that can hold about 103 million barrels under the first of three phases of the reserve plans.
Two of seven sites in the 191 million-barrel second phase were completed by the end of last year and construction has begun on two of the three sites for the third phase, according to CNPC.
“We expect prices to strengthen slightly going forward due to continued supply shortfalls and geopolitical tensions, and continued Chinese buying would help tighten the market as well,” Sijin Cheng, a commodities analyst at Barclays in Singapore, said in an e-mail on May 30.
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 neighboring 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,” Gordon Kwan, regional head of oil and gas research at Nomura, said in an e-mail May 23. The buying will sustain “high oil prices at least above $100 for the rest of the year,” he said.
Crude imports are also fed into new refineries, which build stockpiles before starting full operations. China’s refining capacity is forecast to rise 6.5 percent to 40.6 million tons this year, CNPC said in the January report. That’s about 13.4 million barrels a day. The country imported 6.17 million barrels a day during May, up 11 percent from the same month last year, the General Administration of Customs said June 8.
The U.S. established its strategic petroleum reserve in 1977 after the 1973-74 Arab oil embargo. The storage, located in the Gulf Coast where more than half of U.S. refining capacity is located, peaked in 2009 at 726.6 million barrels, according to the EIA, the Energy Department’s statistical arm. Supplies were 691 million as of May 23, enough to support 37 days of consumption.
The SPR has been tapped three times for emergency releases, most recently in June 2011 when a sale of 30 million barrels was announced as part of an IEA plan to ease shortages of Middle East supply.
The U.S. reserve can hold the equivalent of about 95 days of imports, while China’s can probably now cover about 21 days, according to estimates by Amrita Sen, a London-based analyst with Energy Aspects Ltd., a research company.
Purchases for China’s strategic supply will pull 200,000 to 300,000 barrels a day of crude from the global market this year, CEBM Group, an independent investment advisory firm based in Shanghai, said in a March research note.
The buying may add $2 to $3 a barrel to Brent prices, according to Guo Chaohui, an oil analyst at China International Capital Corp., a Beijing-based bank.
–With assistance from Winnie Zhu in Singapore and Moming Zhou in New York.
Copyright 2014 Bloomberg.