Oil is cheap and China is buying.
That’s the gist of reports which drove crude prices sharply higher on Thursday on the heels of the worst quarterly rout on record.
Brent rose as much as 13% on the news, which suggests officials in Beijing have ordered their stockpiles filled following Q1’s epic price collapse.
This sounds like a pretty comprehensive effort on China’s part. The ubiquitous “people with knowledge of the matter” told Bloomberg that government agencies are required to hastily “coordinate filling tanks [and] may use commercial space for storage, while also encouraging companies to fill their own tanks”.
Trump tried to issue a similar directive last month, but ultimately, Republican efforts to include billions in funding for Strategic Petroleum Reserve purchases in the third virus release bill were scrapped. That funding could come later, though.
Reports that China was planning to boost its state stockpiles have been in the rumor mill since early last month. Nobody knows precisely how much China stores in its reserves, but it goes without saying that a buying spree by the world’s largest importer would be welcome news for a market that’s drowning in supply (thanks to a planned deluge from Saudi Arabia) and grappling with a demand shock unseen in history (courtesy of the coronavirus outbreak).
According to the sources who spoke to Bloomberg, China’s aim is to get stockpiles to 90 days of net imports, a figure which may double over time. That initial goal would entail around 900 million barrels.
Of course, this won’t be enough to offset the twin supply-demand shocks that drove crude to its worst quarter on record, but it can’t hurt, either.
In addition to the buying plans, China intends to expand its capacity by building more storage sites, the same people hinted, a move which would double as a stimulative infrastructure initiative at a time when the world’s second-largest economy is trying to get cranking again after being waylaid by the coronavirus shutdown.
Two consultancies (SIA Energy and Wood Mackenzie) say China could add anywhere between 80 and 100 million barrels to its reserves before bumping up against storage constraints. SIA puts China’s stockpiles (including commercial storage) at about 996 million barrels.
“Let’s go out and buy”, Steve Mnuchin told Fox, in an interview last month. “Fill up the reserve”.
He was pushing Trump to ask Congress to spend some $20 billion buying up oil in order to top off America’s stockpiles for the next decade.
“At $22 for WTI crude we should be filling up the reserve for the next 10 years”, Mnuchin explained. “We are energy independent, but obviously at these prices we’re going to have issues producing energy”.
Yes, “obviously”. As Bloomberg noted in March, “at today’s prices, $20 billion could buy more than 800 million barrels of oil — far exceeding the reserve’s total capacity of 713.5 million barrels”.