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China Stockdraws Have Limited Price Effect

Copyright © 2021 Energy Intelligence Group
CHINA CNOOC

China's release of crude from its strategic petroleum reserve (SPR) and commercial inventories signals that Beijing is unwilling to pay today's robust prices for oil. But despite China's importance to global oil markets, the move is unlikely to have a lasting, bearish effect on prices. Benchmark Brent returned above $75 per barrel this week — its highest level since late July — despite China's increasing reliance on inventories, which has weakened the world's largest crude importer's appetite for spot crude. This shows that importers have limited power to drive down prices in this market, no matter how much they draw from inventories. To be sure, China draining 70 million barrels from crude stocks since April has taken some heat out of Brent's rally, as some thought the benchmark was destined to surpass $80. But China’s bold moves coincided with the rise of the Covid-19 Delta variant, which hurt demand and spooked bulls. Delta is now fading, paving the way for Brent to move higher. China’s official confirmation last week that it would release oil from its SPR knocked $1 from the oil price — a kneejerk reaction from hot money reading headlines. This was quickly reversed when the market realized that the news was old. Beijing hatched plans for inventory draws in March when Brent surpassed $70 for the first time since early 2020. China’s commercial stocks fell from 906 million bbl in late March to 835 million bbl at end August, while the SPR is expected to drain 20 million bbl to 250 million bbl. China’s SPR is a black box — it could hold more, but that would simply mean a reclassification of stocks as strategic versus commercial.

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