China's continued filling of its strategic crude reserves could give support to current depressed oil prices and help rebalance the global market, Bernstein Research suggested in a new report issued Wednesday.
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While China's oil demand growth has been weak this year, its crude imports have surprised to the upside, with inflows rising 8.3% over the first nine months of the year to an average 6.14 million b/d. This has outpaced the 5.3% growth seen over the same period of 2013.
This year has been the strongest year of crude oil import growth in China since 2010, according to Bernstein.
"The key factor that explains such discrepancy could be China's filling of SPR [strategic petroleum reserves], which could further accelerate given the low oil prices and elevated geopolitical risk," Bernstein said.
CLOSE TO 90% OF CURRENT SPR CAPACITY FILLED
The bank estimates that China's SPR level had reached 204 million barrels by August, equivalent to 30 days of imports. This was about 40 million barrels higher compared with the end of 2013.
Phase 1 of China's SPR, totaling 103 million barrels, is widely believed to have been filled by 2009 when oil prices were well under $100/barrel.
The Lanzhou and Dushanzi sites with 38 million barrels of total capacity under the second phase were likely filled in late 2011, while another 59 million barrels is believed to have been filled this year at two sites in Tianjin and Shanshan in western Xinjiang, Bernstein said.
Another three sites with capacity of 69 million barrels are expected to be completed this year, while 44 million barrels in Zhanjiang, Guangdong province, is slated for completion in 2015, with the last 16 million barrels under phase 2 SPR, in Jintan, Jiangsu, likely to be completed the following year.
This means China will have additional 129 million barrels of phase 2 capacity coming online by the end of 2016, according to the report.
Beyond that, there have also been reports that the third phase could add another 171 million barrels of capacity.
Unlike the first and second phases, the third phase is expected to involve SPR sites that are further inland, such as Sichuan, Henan and Yunnan provinces. They will also likely be underground caverns, which will take much longer to build than above-ground storage.
Bernstein said that given current mounting geopolitical risks, it is fair to assume China wants to secure 90 days of import cover through to 2020, although this will require a fourth phase of SPR to be built before then.
"China will need 571 million barrels of storage by 2015 and 714 million barrels of oil in storage by 2020 to cover 90 days of import, which requires aggressive infrastructure build-out post 2016," Bernstein said.
WILL CHINA ACCELERATE SPR FILLING?
Bernstein said China has in the past appeared to fill any spare SPR capacity immediately if oil prices remained stable. It therefore believes China will likely take advantage of recent weak oil prices to do the same.
Spare SPR capacity was estimated to be around 30 million barrels in August, although this could rise to 68 million barrels if new phase 2 sites at Jinzhou in Liaoning province and Zhoushan in Zhejiang are ready in the coming months.
This could mean incremental crude oil demand from China of 224,000 b/d next year and 125,000 b/d in 2016 in order to fill the SPR, the bank said.
"In fact, we expect SPR filling to contribute to more than 30% of China's crude oil demand growth from 2015 onward," Bernstein said.
This likely means that the oil market will tighten next year as demand growth outpaces expansion in non-OPEC supply.
"We expect a re-balancing of global oil supply and demand in 2015 will trigger the next up-cycle in oil prices. While it is difficult to time the bottom of the current down-cycle, current crude prices are not sustainable for either marginal producers or for OPEC," Bernstein concluded.