Fuel for Thought: Asian oil buyers have little room to play around with SPRs

The word "strategic" in the phrase Strategic Petroleum Reserves is there for a reason and no one understands it better than Asia's biggest oil importers.

With the energy security aspirations of Asia's biggest four oil importers—China, India, Japan and South Korea—perpetually vulnerable to global price gyrations, they have increasingly expanded their SPR capacity over the past decades—an effort to ensure they have an emergency oil storage facility that can be used to mitigate oil supply disruptions.

But when crude oil prices crossed $85 a barrel earlier this year, Asian oil importers worried this would derail a fragile economic recovery. As a result, for the first time countries like India and China turned to strategic oil reserves to cushion the impact of rising prices.

Market sources are unanimous in their view that Asian importers will be reluctant to release huge volumes from SPRs and make it an ongoing trend—just as a cushion for high prices

The market also witnessed coordinated SPR releases by Asian consumers, along with the United States. While market reaction to the development has been muted so far, largely because actual releases have come in below expectations, traders have one key question in mind: Will this be an ongoing trend?

"Adding a layer of uncertainty is the fact that China and India are large net oil importers. So they will likely seek to restock their strategic buffers at some point. This will add a degree of market support down the road, potentially at even higher crude price points," said Paul Sheldon, chief geopolitical advisor at Platts Analytics.

Immediately after the White House announced Nov. 23 that the US will release 50 million barrels from its SPR early next year, India, China, South Korea and Japan followed suit and announced their plans to release SPRs.

While India agreed to release 5 million barrels of crude, China is expected to release more crude from state reserves amid expectations that the second set of auctions could potentially include at least 7 million barrels of medium sweet ESPO blend crude.

South Korea has agreed to release 3.17 million barrels from its SPRs, including 2.08 million barrels of crude oil and 1.09 million barrels of refined products, over a three-month period starting January.

And Japan's sales of national petroleum reserves will be made by advancing its planned sales of crude oil grades for replacement in the national petroleum reserves without violating the country's petroleum stockpiling law. The sales could amount to around "a couple of hundred thousand kiloliters," according to Minister of Economy, Trade and Industry Koichi Hagiuda.

It's a different story in Asia

Market sources are unanimous in their view that Asian importers will be reluctant to release huge volumes from SPRs and make it an ongoing trend—just as a cushion for high prices.

Take the example of India. The country has an SPR capacity of 5.33 million mt. And for the second phase, the federal cabinet has given its approval to build a further 6.5 million mt of SPRs. While the first phase, which is fully filled, can cater to about 9.5 days of India's crude oil requirements, the second phase will add another 12 days.

"While state refiners in India also hold substantial volumes of oil, the overall volumes are not big enough. The last thing countries like India will want is expose themselves by releasing huge volumes when prices are high and find themselves being caught off guard when there is a supply disruption," said one senior oil industry source.

Asian countries have followed a similar model of building SPRs that of the United States.

While the idea of stockpiling emergency oil in the US arose as early as 1944, it took the oil embargo of 1973-74 to spur the creation of the Strategic Petroleum Reserve.

But for the US, the growth of shale and a large SPR balance provide the country with flexibility to sell SPR stocks to plug fiscal deficits, as Congress has done with budget bills since 2015, as well as enact price-related releases without a need to ever return the barrels.

According to Platts Analytics, the Congress appears determined to sell of the majority of the SPR for fiscal reasons. Large deliveries required through 2031 are set to reduce the Reserve's balance to 316 million barrels, versus 695 million barrels as recently as 2016.

This would no doubt reduce the flexibility to release strategic stocks during a supply interruption, as the SPR was originally intended. But despite that, the risks for the US would be much lower due to its growing shale sector, compared with some Asian countries like South Korea, which imports 100% of its oil needs, and India, which ships in 85% of its petroleum requirements.

More ways than one

Asian energy analysts and senior energy industry leaders believe there are more effective ways to tame energy-related inflation, such as lowering fuel taxes, while leaving SPRs volumes intact to act as a cushion during major geopolitical events like war.

Even major Asian refiners, such as SK Innovation, Cosmo Oil, ENEOS, PTT, BPCL, shared similar views.

For instance in South Korea, the ministry of economy and finance decided to lower taxes on auto fuels by as much as 20% for six months from November in an effort to ease pump prices.

And in Japan, the Ministry of Economy, Trade and Industry decided to provide subsidies to curb retail price increases of gasoline, kerosene, gasoil and fuel oil from the end of December until the end of March.

OPEC and its Russia-led allies have pledged that they will plow ahead with a production increase for January, despite their own predictions of a looming oil surplus. They agreed in early December to raise quotas by 400,000 b/d, as prescribed by its supply pact.

Although OPEC and its allies are adopting a cautious approach, Asian refiners feel producers are raising production at a slower-than-desired rate.

"Releasing strategic stocks in the absence of a major supply disruption, with the sole intent to influence price, sets a precedent which could have a lingering effect on the market and OPEC+ production decisions," Sheldon of Platts Analytics added.