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China made headlines last week with the announcement that it would release crude oil from its strategic oil reserve and sell it in a move Bloomberg called “an unprecedented intervention”.
Indeed, it was the first time that China announced the sale of oil from its strategic reserve. The size of this reserve is unknown because the government never releases this data, but analysts have used satellite imagery to estimate how much oil is stored by China.
The reason for the move was, of course, Oil price. At over $ 70 a barrel, crude appears to have become too expensive for Beijing after producer price inflation hit a 13-year high last month, according to a Reuters report. The same report quoted the Chinese administration of national food and strategic reserves, saying that oil sales “would better stabilize supply and demand in the domestic market and effectively guarantee the country’s energy security.”
The largest economic greenhouse in the world, which so far this year has grown by 8.44 percent, has struggled with high commodity prices for months, just like the rest of the world. Unlike the rest of the world, he has levers to pull when he decides he’s had enough.
What’s interesting is that this may not be the first time that China has sold oil from its strategic reserve. Yet this is the first time he’s made it public, Amrita Sen of Energy Aspects Recount the Financial Times.
“It’s not new, but the announcement is new and I think it’s an attempt on their part to temper domestic prices,” Sen explained.
The other interesting thing, as noted in the Financial Times report on the news, is that the first such announcement came shortly after the last OPEC + meeting where the cartel decided to continue adding the production at rates agreed to earlier despite calls – including from US President Joe Biden – to increase supply in the market to temper price increases. As Reuters columnist Clyde Russell Put theSelling oil was all about the message, not so much the oil itself.
Since the pandemic, the world’s major importers of crude oil appear to have become increasingly sensitive to fluctuations in oil prices, especially when the variation is on the rise. Former Indian Oil Minister Dharmendra Pradhan was particularly swift and vocal in his reactions to any OPEC move to raise prices above what New Delhi was comfortable with.
India has responded to some of these measures by ordering its state-owned refiners to limit purchases from oil producers in the Middle East. China has also diversified its suppliers. Today, India is selling oil from its strategic reserve. In fact, it announced its sale a few weeks before China. The purpose of the sale reported at the time was to lease space from refiners, but whether intentional or not, the sale would have a effect on prices.
“The Chinese government has been extremely worried about inflation [so] they do it at all levels. They released strategic stocks of almost all commodities, ”Sen of Energy Aspects, quoted by the FT.
Inflation has become a source of concern – not just in China – but few countries have the reserves to release to mitigate the effects of rising prices. However, it is impossible not to interpret the withdrawal of barrels from the strategic reserve as a warning to OPEC +.
Rising oil prices have been a major driver of inflation, but OPEC + has maintained its original plan of adding no more than 400,000 bpd to its combined output until it return to the pre-pandemic level. Meanwhile, according to the latest OPEC monthly report, demand is expected to exceed pre-pandemic levels as early as next year.
With OPEC + so insensitive to calls for more production, prices are even higher if this forecast comes true. And this could lead to an even more complicated inflationary situation for large importers because strategic reserves, however abundant, are still limited.
By Irina Slav for Oil Octobers
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