China is likely working on releasing crude oil from its state reserves via auctions, but the move may not garner refiners' firm interest to bid up as domestic demand slows down amid pandemic-related curbs ahead of Winter Olympics, sources within the oil industry told S&P Global Platts on Nov. 18.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
Media reports from the virtual summit between US President Joe Biden and President Xi Jinping of China state that Biden requested that China release oil from its state reserves to stabilize crude oil prices.
The possible move would signal that Beijing is stepping up efforts at home to ensure plentiful domestic supplies and battle inflation at a time global energy prices are going through the roof.
To ease high feedstock costs faced by the refining industry, the National Food and Strategic Reserves Administration announced a release of state crude oil reserves to the domestic market via auctions Sept. 9.
The first attempt of state crude reserves auctions was completed Sept. 24, with PetroChina and Hengli Petrochemical (Dalian) said to have been awarded 4.43 million barrels of crude at the notional prices offered by the administration, with 2.95 million barrels of Murban failing to find a buyer.
There have been no announcements from the administration on the next round of auctions.
Market participants are keeping an eye out for further developments, as up to 40 million barrels of state crude reserves were previously expected to be released by three auctions in 2021.
"It is possible to have another round of auctions in the rest of the year given the background of the China-US talk," a Beijing-based senior official with a state-owned trading company said.
"[Another set of auction is] not a difficult task for the administration with the experience gained from the first set," a Guangzhou-based analyst said.
Demand, price soften
However, "due to the bearish outlook of the China's oil product demand till Winter Olympics [in February], refineries are not that eager to take the state barrels," the Beijing-based senior official said.
Beijing is set to limit refining activities in north China in order to cap emissions ahead the event.
Meanwhile, Chinese government's zero-tolerance controls on pandemic reemergence will continue to cap the country's demand for transportation fuels such as gasoline and jet fuel.
Gasoil surplus could build up post a slowdown in retail logistics and construction activity during the winter months, analysts said.
S&P Global Platts Analytics estimated China's gasoline demand to fall 1.3% on the year to about 3.6 million b/d in Q4, gasoil to edge down 0.5% to 4.2 million b/d while jet fuel to drop 13.4% to 730,000 b/d from the same period of 2020.
International crude prices also softened recently, with front month ICE Brent averaged at $82.85/b as of Nov. 18, down from the average of $83.7/b in October.
In addition, refineries have fixed feedstocks, according to their refining plans despite the chance to get cheap crudes from the government.
"The releases will be just icing on the cake, which we cannot rely on," a Sinopec refiner said.
"To many uncertainties around the state crude release, like the grades, release time, location, volume, all these are dependent on the government's decision," a source with Zhejiang Petroleum & Chemical said.
The state crude reserves in Zhoushan Zhejiang province are expected to be released next during auctions.
Located in Zhoushan, ZPC is expected to benefit most from the possible auction as it can use its newly granted 12 million mt of crude import quota for 2021.
China's crude stocks, including commercial and state reserves, peaked at 937.71 million barrels in September 2020, but is estimated to fall to a 21-month low of 822.37 million barrels in November, according to data intelligence firm Kpler that monitors 1.4 billion barrels of storage capacity in the country.
China suspended releasing data on state crude reserves, commonly known as Strategic Petroleum Reserves in international markets, in 2017.
According to the National Bureau of Statistics, as of end-2017, China held 37.73 million mt (276.56 million barrels) of crude in nine SPR storage facilities in Zhoushan, Zhenhai, Dalian, Huandao, Dushanzi, Lanzhou, and Tianjin.