(The views expressed here are those of the author, a columnist for Reuters.) By Clyde Russell LONDON, Oct 10 (Reuters) – Is China's stockpiling of crude oil bearish or bullish for prices? Unfortunately there is no clear cut answer to the question, as much depends on details that are simply not available, meaning the market has to rely on very limited data, which in turn drives speculation and uncertainty. China does not disclose the volumes of crude it places into strategic and commercial reserves, and it also does not state what its ultimate target volume is for inventories. This means the market is forced to rely on unnamed sources within the Chinese oil sector for a drip feed of information, which, while useful, is hardly definitive on what the world's largest buyer of crude is actually doing. There are a wide variety of estimates of how much crude China has stored so far this year, but most analysts cite a figure of at least 500,000 barrels per day (bpd). That does fit in with calculations of China's surplus crude, a number that is arrived at by adding together the volume from imports and domestic output, and then subtracting the amount processed by refiners. On that basis China's surplus crude was 990,000 bpd for the first eight months of the year, but it is worth noting that not all of this surplus is likely to have been added to storage as the official data does not capture some volumes processed in small refineries or petrochemical plants. But if the assumption is that China has added at least 500,000 bpd to storage so far this year, the question becomes how has this affected the market? Global benchmark Brent futures have been quite stable since April, trading in a range around $65 a barrel, apart from a brief spike higher during the conflict between Israel and Iran. It is likely that prices would have been weaker if China's import demand had been consistently 500,000 bpd weaker than it has been. In effect, China's stockpiling has allowed the eight members of OPEC+ to unwind their voluntary cuts of about 2.5 million bpd without crashing prices. The question then becomes how much more oil China is likely to store in coming years before it reaches its target. OUTCOMES VARY There is a wide range of estimates as to how much oil China already has in both strategic and commercial storages, with the low end being 800 million barrels and the high end being around 1.4 billion. There is also considerable speculation as to how much more Chinese authorities want to stockpile, with the high end reaching around two billion barrels. And finally there is no certainty as to when they want to complete this process, but the consensus is by 2028 at the latest. This means that depending on where you actually think their reserves currently are, and where you think they want to end up, there is a wide range of possible outcomes. If China wants to add another 1 billion barrels to storages over a three-year period, this works out to around 913,000 bpd, which would be bullish for oil prices. But if you assume it already has around 1.4 billion barrels in tanks and wants to add only 600 million more, then that amounts to around 550,000 bpd over the next three years. This is a level around current storage flows, so it does provide support to oil prices, but does not necessarily drive them higher. The other factor to note is that China has a track record of being flexible in building inventories, buying more crude when it deems prices to be reasonable and pulling back when it believes prices have risen too high. A recent example of this may be seen in its September imports, which dropped to 10.83 million bpd from 11.66 million bpd in August, according to data compiled by LSEG Oil Research. September was the weakest month since February and the drop in imports came after the price spike in June, when Brent reached as high $81.40 a barrel as Israel and Iran clashed. September-arriving cargoes would largely have been arranged during this period of higher prices, and it is likely Chinese refiners decided to ease back on their imports and await a return to lower prices. In effect, China's stockpiling becomes a stabilising factor for oil prices. China will buy more crude if prices stay relatively low and stable, thus providing a floor to the market, but will pull back on imports if prices move higher, thus providing a ceiling. Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X. The views expressed here are those of the author, a columnist for Reuters. (Editing by Clarence Fernandez)
(The article has been published through a syndicated feed. Except for the headline, the content has been published verbatim. Liability lies with original publisher.)
