China will release state crude oil reserves to the domestic market via auctions -- the first such move -- to ease high feedstock costs faced by the refining industry, the country's National Food and Strategic Reserves Administration said late Sept. 9.
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NFSRA, a division of the country's top planner National Development and Reform Commission, did not provide details about thevolume of crude that will be released, but analysts estimated it could be 5 million-10 million mt (36.65 million-73.3 million barrels).
This is looked at as part of Beijing's serial state reserve release following the same for cotton, copper, aluminum and zinc.
"It is time for China to openly influence the market as the world's top crude importer with the biggest crude inventory. So the public auction is a right step," a Beijing-based analyst said.
"We expect the volume not [to] be low, as the announcement has shown Beijing's intent to influence the market," the analyst added.
Analysts said the auction will cap the country's crude imports over November 2021-February 2022 amid expectations that the first phase of the auction will take place in October after more details are published.
Refiners widely expect the auction price to be lower than the market level, given the government's effort to offset high refining cost pressure and the fact that stocks were built at low prices last year.
Platts Dubai was assessed at $69.98/b on Sept. 9, surging from $39.75/b on the same day last year, S&P Global Platts data showed.
Most of China's crude reserves are sour grades to fit the country's mainstream refineries' crude slate.
Buying the reserve crude barrels will help refiners get prompt supplies from the doorstep, instead of the usual long trading cycles of about two months for imports from the international market.
"So that is also a good choice for refiners who have prompt feedstock demand, such as the upcoming private Shenghong Petrochemical," a Singapore-based analyst said.
China expanded storage facility
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.
China expanded its crude storage capacity by around 30 million cu m (188.7 million barrels) in 2020 and 2021, enabling the world's top importer to adjust its supplies more efficiently along with price and market changes, according to market sources.
The country's crude stocks, including commercial and state reserves, peaked at 937.71 million barrels in September 2020, but fell to around 863 million barrels since July 2021, according to data intelligence firm Kpler that monitors 1.4 billion barrels of storage capacity in China.
The destocking led to a 5.7% year-on-year drop in China's crude imports to an average 10.45 million b/d over January-August, customs data showed.
Beijing also rents private commercial storage in addition to the state reserves storage bases operated by state-owned oil giants.
In Zhoushan, for example, around 8 million mt of crude has been stored in official state reserve facilities, while another 1 million mt of crude has been stored in commercial tanks rented by Beijing, according to a source with knowledge of the matter.
China has occasionally released state crude reserves to Sinopec, PetroChina, CNOOC, and Sinochem -- the state-owned oil giants who built most of the reserve tanks, and purchase and store the crude barrels on behalf of the government.
Details of such releases, including price and volume, are kept confidential, though market talk indicated that the latest reserve release amounted to 22 million barrels in July.
"We take some barrels out and inject new shipments with the same volume," a Shandong-based Sinopec refiner said.
A public auction, however, suggests a different mechanism.
"This means selling the reserve barrels at the auction price, and the reserve operators will take opportunities to stockpile later with the money," another Beijing-based analyst said.
Auction for large integrated refineries
According to the NFSRA's statement, the auctions are mainly for integrated refining and chemical plants, which suggests that private Hengli Petrochemical (Dalian), Zhejiang Petroleum & Chemical, and Shenghong Petrochemical are allowed to buy the SPRcrude with their available crude import quotas.
The greenfield 16 million mt/year Shenghong Petrochemical just obtained its first crude import quota of 2 million mt to kick off its trial run in late October or early November, Platts reported on Sept. 9.
On the other hand, a source with Hengli said the private refiner will be interested in participating in the auction if the price is competitive.
ZPC would, however, like to make a decision later when it gets additional quotas for its new 20 million mt/year Phase 2, a refinery source said.