After the OPEC+ club met on September 1st, and confirmed that it would be sticking to its plan of increasing its crude supply by 400,000 b/d a month through December, China made a rather unusual announcement. It announced that it was going to release some crude oil from its strategic petroleum reserves, selling it to domestic refiners that were grappling with crude’s heady price rise over 2021. The release of strategic oil reserves isn’t news in itself. What is news is that the usually secretive China did it and did it publicly.
And it did it to send a message to OPEC+: attempts to create artificial scarcity to maintain crude prices will not be tolerated. China has a right to feel that way. Even though great strides have been made to ease the effects of the Covid-19 pandemic worldwide, the virus is still exerting major effects on the global economy. Not least a massive ripple through the health of global supply chains that has seen the price of almost everything – plastics, semiconductors, agricultural commodity, lumber, steel – spike due to supply issues. In some cases, the prices of raw materials are at historic highs. Crude oil is still nowhere near its peak of above US$100/b, but it is high enough to be concerning, especially since it is happening within a major inflationary environment. And for a manufacturing-heavy economy like China, that matters. That matters a lot. So China’s National Food and Strategic Reserves announced that it would be releasing some of the country’s crude stocks to ‘better stabilise domestic market supply and demand, and effectively guarantee the country’s energy security’, a month after the country’s producer price inflation – ie. the cost of manufacturing – hit a 13-year high.
China made good on that promise, releasing 7.38 million barrels from its stockpile to domestic bidders on September 24 with more tranches expected. This was the first ever recorded release from China’s Strategic Petroleum Reserves (SPR), which began back in 2009 in serendipitous response to crude oil prices exceeding the US$100/b mark for the first time in 2008. But curiously, it may not have been the first ever release. So secretive is the SPR that China does not reveal the size of the reserve, although analysts have estimated it at some 300-400 million barrels with total capacity of 500 million barrels using satellite imaging. It has been speculated that batches of crude from the SPR have been released before on the quiet. But this is the first time China has gone public. Compared to the country’s overall oil consumption, 7.38 million barrels is small, almost tiny. And even if additional supplies are released, it will not make a major impact on China’s oil balances. But the message is what is important.
It is a message that China is not alone in sending. US President Joe Biden has already called on OPEC+ to accelerate its supply easing plans, given indications that the crude glut built up over 2020 has been all but erased. It is a notion that would be supported by some OPEC+ members – Russia, Mexico, the UAE – but so far, the discipline advocated by Saudi Arabia has held. The US too has attempted to release of its own crude reserve stocks – the largest in the world with a capacity of 727 million barrels – but this was also in response to the devastating impact of Hurricane Ida. India, China’s closest analogue to size and stage, has been complaining too. As a major oil importer and with a shakier economic situation, India is particularly sensitive to oil price swings. US$70/b is way above what New Delhi is comfortable with. But since India’s appeals to OPEC+ have fallen on deaf ears, it is attempting domestic directives instead. India’s state refiners have been ordered to reduce crude purchases from the Middle East, but with supply tight, there aren’t many other people to buy from. India has also been selling oil from its strategic reserve – officially stated to be for clearing space to lease storage capacity to refiners – although since India is more transparent about these announcements, the announcement isn’t as surprising.
Will it work? At least immediately, no. Crude prices did come under pressure in the wake of China’s announcement, but then recovered with Brent hitting US$75/b. But the fact that China timed the announcement of the September 24 auction to coincide with peak global trading time and with a lot of details (again an unusual move) shows that Beijing is serious about wielding its strategic reserves as weapons. If not to moderate crude prices, then to at least stabilise it. But this is a war of attrition. China may very well have a planned schedule to release more crude reserves over 2021 and 2022 if prices remain high, but its supplies are finite. And they will have to eventually be replenished, possibly at an even higher cost if the attempt to quell crude price inflation fails. Thus far, the details of the SPR release hint that this is a tentative dip in the pool: the volume of 7.38 million barrels was far lower than the 35-70 million barrels predicted by some market participants. And because successful bidders can lift the oil up to December 10, it seems unlikely that a second auction for 2021 is in concrete plans at this point.
But, at the very least, the message has been sent. Beijing has a tool that it can wield if crude prices get out of hand, and it is not afraid to use it. The first step might have been small, and it is a giant leap in what mechanics are available to influence crude prices. And as history has proven, China can be very quick to scale up and very single-minded in its approach. Over to you, OPEC+.
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In our International Energy Outlook 2021 (IEO2021) Reference case, we project that, absent significant changes in policy or technology, global energy consumption will increase nearly 50% over the next 30 years. Although petroleum and other liquid fuels will remain the world’s largest energy source in 2050, renewable energy sources, which include solar and wind, will grow to nearly the same level.
Source: U.S. Energy Information Administration, International Energy Outlook 2021
Falling technology costs and government policies that provide incentives for renewables will lead to the growth of renewable electricity generation to meet growing electricity demand. As a result, renewables will be the fastest-growing energy source for both OECD and non-OECD countries. We project that coal and nuclear use will decrease in OECD countries, although the decrease will be more than offset by increased coal and nuclear use in non-OECD countries.
We project that global use of petroleum and other liquids will return to pre-pandemic (2019) levels by 2023, driven entirely by growth in non-OECD energy consumption. We do not project OECD liquid fuel use to return to pre-pandemic levels at any point in the next 30 years, in part because of increased fuel efficiency.
Source: U.S. Energy Information Administration, International Energy Outlook 2021 Reference case
Note: Delivered consumption includes fuels directly used by the end-use sectors as well as electricity, excluding generation, transmission, and distribution losses.
We project that the industrial sector will increasingly consume petroleum liquids as feedstock in the expanding chemicals industry. In OECD countries, liquid fuel consumption in the industrial sector will grow three times as fast as liquid fuel consumption in the transportation sector.
Delivered electricity consumption will grow the most in the residential end-use sector. We project that in non-OECD countries, electricity will account for more than half of the energy used in households by 2050, compared with 33% in 2020. In non-OECD commercial buildings, we project that electricity will make up an even larger share of energy consumption in 2050, at 64%.
Globally, we project increased consumption of natural gas through 2050. The industrial sector is the main contributor to the growth in global natural gas consumption through 2050 in our Reference case, largely in non-OECD countries. Across OECD countries, gains in energy efficiency will reduce household natural gas use by 2050. The industrial sector will use the largest share of both natural gas and coal among all end-use sectors. Industrial coal use will expand fastest in non-OECD countries, where energy-intensive industries such as iron and steel production are expanding more quickly than in OECD countries.