Are China’s Crude Reserves Quietly Dwindling?

By Haley Zaremba

When it comes to its strategic petroleum reserves–and most other things, for that matter–China keeps its cards close to the vest. While tight-lipped government agencies have not and likely will not release detailed data about their strategic petroleum reserve and commercial crude storage, however, the international community can still get a rough idea of China’s crude stockpiling by reviewing what is public information: refinery throughput numbers and documented quantities of both Chinese domestic as well as imported crude. And these numbers tell a very interesting story.

Despite higher oil prices in the first quarter (with a whopping 33 percent increase of global benchmark Brent), all signs indicate that China, the world’s largest importer of crude oil, has continued to stockpile large volumes of crude in a wide array of both strategic petroleum reserves and commercial storage facilities. According to official data released this week, in the first quarter Chinese refineries processed 12.6 million barrels per day (bpd) of crude–a 4.4 uptick from the previous quarter. Meanwhile imports of crude to China reached 9.83 million bpd and domestic output clocked in at 3.84 million bpd for a grand total of 13.67 million bpd.

As reported by Reuters, some simple subtraction (total available crude minus refinery output) shows us that there is 1.07 million bpd unaccounted for. It’s a safe assumption that this massive volume of crude is sitting in storage somewhere in China, in a mix of strategic petroleum reserve and commercial storage. By comparing the same calculation from the previous quarter, which showed a 950,000-bpd gap between available crude and refinery output, we can see that China has continued to accelerate the rate at which they are stowing away crude oil–an overall increase of 57,000 bpd from quarter to quarter.

While this is an impressive increase during a quarter when crude prices have climbed significantly, the shipments of crude arriving in China during January and February would have been purchased at a time when crude prices were significantly lower and even decreasing. In fact, the crude volume gap that is speculated to represent the amount of crude being stored in China already began to decrease in the last month, narrowing to approximately 690,000 bpd. It remains to be seen whether China will be able to maintain its rate of storage in light of the current market, as well as other recent changes in the Chinese crude market.

One year ago China opened its futures market to the world and launched a new crude oil futures contract and exchange called the Shanghai International Energy Exchange (INE) with the aim of attracting international players and establishing a novel China-based global pricing point for crude oil (in competition with established price benchmarks such as Brent, WTI and Platts Dubai).

This is just one of the many changes that makes predicting China’s oil futures and the outcome for strategic petroleum reserve in the next quarter exceedingly difficult. There is also the issue of several Chinese refineries going offline for maintenance, the spectre of U.S. sanctions providing major hurdles for Iran and Venezuela–both exporters to China on a massive scale–especially as the six-month waivers granted by the U.S. for continued imports from Iran expire, OPEC pushing to cap output and raise oil prices even more, and of course market volatility and geopolitical chaos in general.

Long story short, if oil prices continue to rise, and if China can’t count on steady imports from Venezuela, Iran and Saudi Arabia, it will most certainly throw a quite a wrench in the country’s hush-hush campaign to keep the flow of crude into strategic petroleum reserve and commercial storage tanks.

By Haley Zaremba for Oilprice.com

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