Dalian Duo Prevail in China's First Oil Auction

Copyright © 2021 Energy Intelligence Group

State-controlled PetroChina and privately-owned Hengli Petrochemical, which both operate refineries in the northeastern port city of Dalian, have emerged as the successful bidders in China's first official oil auction.

Despite China's important role as the world's top importer and No. 2 consumer of oil, the auction could hardly be described as a market-moving event.

Beijing was offering 7.38 million barrels of crude, but only 4.43 million bbl found takers. Sources told Energy Intelligence on Friday that some 2 million bbl went to PetroChina and about 2.4 million bbl to Hengli.

Nevertheless, this first auction of oil from China's strategic petroleum reserve (SPR) is likely to be followed by more as the country starts using sales of raw materials from its strategic stockpiles to signal its discontent about high commodity prices.

Local Advantage

This inaugural sale was for crude stored in Dalian, so refiners with plants in northern China were best placed to participate, based on transportation costs.

In addition to state-owned companies, only private companies with integrated refining and petrochemical operations and unused crude import quotas were eligible to bid.

This made big private players like Hengli, Rongsheng/Zhejiang PetroChemicals (ZPC) and newcomer Shenghong Petrochemicals likely candidates to bid in the auction, sources had previously told Energy Intelligence.

Nearly 3 million bbl of Abu Dhabi's Murban crude failed to find a buyer — possibly because of the relatively large volume up for grabs. It was also the lightest crude on offer, which may have made it less attractive to operators of complex refineries, which are built to run heavier grades.

Bargain Prices

Medium, sour Oman and Qatar Marine crude were sold at a price of $65 per barrel, as was lighter North Sea Forties crude. Abu Dhabi's Upper Zakum crude fetched a price of $70.50/bbl, a source told Energy Intelligence (see table).

Brent crude futures settled just above $78/bbl on Friday, making the auction prices a good bargain for the buyers.

"The winning price is very cheap," said a crude trader.

On the other hand the auction prices were well above the $20-$40/bbl range in which Brent was trading last year when the oil offered for sale on Friday was purchased. That ensured a healthy profit for the Food and Strategic Reserves Administration, which manages China's SPR crude.

Beyond dissatisfaction with high commodity prices, another motive for the auction could be a desire to manage the strategic stockpile on a more commercial footing.

What’s Next?

Looking ahead, market players expect China to proceed with a second auction of SPR crude, and perhaps before it does so it might allocate a fourth batch of crude oil import quotas to private companies, so that there is broader participation next time.

"The SPR could release 33 [million] to 82.5 million bbl of crude oil in this series of auctions," Wood Mackenzie's Alex Sun said in a commentary note on Friday.

China currently holds an estimated 250 million-270 million bbl of strategic oil reserves, after drawing them down in recent months. It is also estimated to hold more than double that volume in strategic commercial oil reserves.

Auctions of oil from the country's strategic reserves could provide China with a tool to exercise some influence over oil prices, something that was not achieved by the launch of the Shanghai crude oil futures exchange in 2018.

Results of China’s First SPR Auction
Crude GradeVol. ('000 bbl)Price ($/bbl)WinnerAPI GravitySulfur Content (%)
Qatar Marine95065.00PetroChina32.701.85
Upper Zakum59270.50Hengli33.901.74
Murban2,954--No Bid40.300.76
Total sold4,429--------
Total offered7,383--------

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