Caixin
Sep 10, 2021 04:26 AM
ECONOMY

China Intervenes in Oil Market With Historic Sale of Reserves

Energy costs have been surging in China, not just for oil but also for coal and natural gas
Energy costs have been surging in China, not just for oil but also for coal and natural gas

(Bloomberg) — China made an unprecedented intervention in the global oil market, releasing crude from its strategic reserve for the first time with the explicit aim of lowering prices.

Energy costs have been surging in China, not just for oil but also for coal and natural gas. Electricity shortages in some provinces have forced factories to cut production. Inflation is rapidly rising, a political headache for Beijing.

In a statement late Thursday, the National Food and Strategic Reserves Administration said China tapped its giant oil reserves to “to ease the pressure of rising raw material prices.” It didn’t offer further details, but people familiar with the matter said the statement referred to millions of barrels the government offered in mid-July.

The Chinese stockpiling agency also said a “normalized” rotation of crude oil in the state reserves is “an important way for the reserves to play its role in balancing the market,” indicating that it may continue to release oil. Putting national reserve crude oil on the market through open auctions “will better stabilize domestic market supply and demand,” the agency said.

No one answered calls to the press offices of China’s State Council and the National Development and Reform Commission seeking comment outside regular business hours.

China, the world’s largest oil importer, has built up a 220 million barrel reserve of the commodity over the past decade, according to Energy Aspects Ltd. The buffer differs from strategic petroleum reserves, known as SPR, held in the U.S. and Europe, which are tapped only during supply outages and wars. China is signaling it’s willing to use its reserve to influence the market.

“On its face, it’s a pretty clear statement of an intent to use the SPR to dampen oil prices for domestic refiners,” said Bob McNally, a former senior White House policy adviser who now runs Rapidan Energy Group, a consulting firm in Washington.

China’s factory-gate inflation accelerated to a 13-year high, and the White House a month ago asked the OPEC oil cartel to pump more crude amid rising gasoline prices in America. Together, the actions in Beijing and Washington suggest that the world’s two largest energy consumers see $70–$75 a barrel as a red line for the oil prices. Hurricane Ida has also eliminated a swath of U.S. crude production, affecting supplies to China’s Unipec.

Brent crude futures fell as much as $1.36 a barrel to $71.24 in London before recovering to trade little changed. West Texas Intermediate had a similar move.

Other Commodities

China has been selling other commodities from its strategic reserves, including copper, aluminum and grains. In the past, Beijing rarely confirmed the releases, which have tended to filter into the market via trader talk. The public release is being seen by many as an attempt to maximize the impact of the move.

Thursday’s statement started by saying the release was carried out “with the approval of the State Council,” language that Chinese researchers took as an indication that it was directed by China’s most senior political leaders.

Without details of what future auctions from the oil reserve may be, traders and consultants were left guessing what Beijing’s next move will be. Amrita Sen, co-founder of consultant Energy Aspects, said China released between 20 million and 30 million barrels over the summer, and any potential extra sales this year would be unlikely to exceed 10 million to15 million barrels.

Beijing has had a mixed success using strategic reserves to cap surging commodity prices. While such releases, particularly when publicly confirmed, often send prices down sharply, the retreats tend to be short-lived.

“The move by China is no doubt designed to ease upward price pressures on rising oil import costs,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “It is unlikely to have the desired effect, as we see it. For starters, it signals vulnerability to the financial oil market, and even more so, it is not enough physical supply to move the dial.”

Contact editor Bob Simison (bobsimison@caixin.com)

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