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(Bloomberg) – China has made an unprecedented intervention in the global oil market, releasing crude from its strategic reserve for the first time with the explicit aim of lowering prices.
The announcement comes amid skyrocketing energy costs in China, not only oil but also coal and natural gas, and power shortages in some provinces that have forced some factories to cut production. Inflation is also rising rapidly, a political headache for Beijing.
In a late statement Thursday, the National Food and Strategic Reserves Administration said the country had drawn on its giant oil reserves to “ease the pressure from rising commodity prices.” He did not provide more details, but people familiar with the matter said the statement referred to millions of barrels offered by the government in mid-July.
The Chinese storage agency also said that a “normalized” rotation of crude oil in state reserves is “an important way for reserves to play its role in balancing the market,” indicating that it could continue to release barrels. The agency said bringing national reserve crude oil to market through open auctions “will better stabilize supply and demand in the domestic market.”
No one responded to calls from the press offices of the Chinese State Council and the National Development and Reform Commission for comment outside normal business hours.
China, the world’s largest importer of oil, has built up a reserve of 220 million barrels of the oil over the past decade, according to Energy Aspects Ltd. The buffer differs from the strategic oil reserves, known as SPR, held in the United States and Europe, which are only exploited during supply blackouts and wars. China is signaling, however, that it is ready to use its reserve to try to influence the market.
“At first glance, this is a fairly clear statement of an intention to use the SPR to lower oil prices for domestic refiners,” said Bob McNally, a former senior House policy adviser. Blanche who now runs Rapidan Energy Group, a Washington consulting firm.
The statement comes after inflation exiting China’s factories accelerated to a 13-year high, and just a month after the White House publicly asked the OPEC oil cartel to pump more of crude amid rising gasoline prices in America. Together, actions in Beijing and Washington suggest that the world’s two biggest energy consumers see $ 70 to $ 75 a barrel as a red line for the price of oil. Hurricane Ida also wiped out part of US crude production, affecting supplies to Chinese company Unipec.
Brent crude futures were little changed Thursday afternoon in London, after falling 1.9% earlier today.
Others products
China has sold other raw materials from its strategic reserves, including copper, aluminum and grains. In the past, Beijing rarely confirmed releases, which tended to filter through the market via traders’ discussions. The public outing is seen by many as an attempt to maximize the impact of the move.
Thursday’s statement began by saying that the release was carried out “with the approval of the State Council,” language Chinese scholars have taken as an indication that it was being led by China’s top political leaders.
Without details on what future oil reserve auctions might be, traders and consultants had to guess what Beijing’s next move would be. Amrita Sen, co-founder of consultant Energy Aspects, said China released between 20 and 30 million barrels over the summer, and that a potential additional sale this year is unlikely to exceed the range of 10. to 15 million barrels.
Beijing has had mixed success in using its strategic reserves to limit the surge in commodity prices. While often the release, especially when publicly confirmed, causes prices to drop sharply, the pullback tends to be short-lived.
“China’s move is undoubtedly designed to ease upward pressure on rising oil import prices,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “It is unlikely to have the desired effect, as we are seeing. For starters, it signals vulnerability to the financial oil market, and more importantly, there isn’t enough physical supply to move the dial. “
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