The available information on China’s Strategic Petroleum Reserve is a mess. The data is sparse, infrequent, and contradictory, which is something one might expect from a strategic sector originating in China. In an apparent attempt to rectify this lack of transparency, in November of 2014 the Chinese government actually stated it would begin regularly releasing official data on its Strategic Petroleum Reserve; however, the data has not been particularly forthcoming, and has been erratic. So, there is still a need to fill information gaps regarding China’s SPR.
The SPR is supposed to eventually hold 500 million barrels, although some are now estimating that figure is meant to rise to 600 million by 2020, based on new demand assumptions and added facilities brought online this year. China has been building its reserve capacity for about a decade, and has been tackling this massive task in three phases, all of which are set to be complete by 2020.
Phase 1, which saw four storage facilities constructed, is widely accepted to be complete, and currently holds around 90 percent of capacity, with 91 million barrels of crude stored, out of a capacity of 103 million, covering 9 days of Chinese consumption.
China is currently in the middle of phase 2 construction, along with all the complexity and confusion that entails. Several of these facilities came online in 2011 and 2014, with others that have been completed earlier this year, and a couple slated to be completed in Q4 of this year. Originally, phase 2 was supposed to have 8 storage sites, but it is now believed that figure has been increased to 10, which will hold approximately 260 million barrels of crude.
Phase 3 is still not yet being constructed according to some sources, but according to others, several phase 3 facilities may be online this year (one already completed, the other potentially completed in Q4 2015), ahead of schedule, possibly adding an extra 50 million barrels of storage capacity by the end of the year.
It is also estimated China has been importing approximately half a million barrels per day over its required import amount. However, the problem with these figures is that it remains unclear how much of that amount is actually going to the SPR and how much is being diverted to other sources, especially to commercial storage, where Chinese NOCs have also been stockpiling in the midst of their own expansion. CNPC (PTR), Sinopec (SNP), and CNOOC (CEO), have all been expanding their own commercial reserve capacity, filling stores with cheap crude, in preparation for a future rise in price.
To complicate the matter further, there simply isn’t any solid data or good information on commercial inventories in China, which may make up a significant amount of oil reserves in the country. Worse yet, some of the official estimates may include reserve data from both government and industry stockpiles, clouding the picture further. Estimates for commercial reserves range anywhere from 200 million to 400 million barrels of crude, and no reliable ways to tell how much is already stored, and how much additional space may be available for new stocks.
As noted earlier, these various SPR facilities are actually run by China’s state oil companies, and Sinopec’s (SNP) facilities appear to have been filled to capacity earlier this year, which means the Zhanjiang facility is full. In fact, most storage sites appeared to be near capacity earlier in the year, before additional sites became operational this year. There are reports that the Jinzhou facility and another Tianjin facility will be online within a few months, which both represent at least 40 million barrels of capacity, but potentially as much as 50 million barrels.
So, the bottom line is estimates of an extra 12-14 million barrels purchased per month indicate there is plenty of room for China to continue to fill its SPR capacity, through the rest of 2015, especially as additional facilities come online in the 4th quarter. This is true through a significant part of 2016 as well, as more SPR facilities become operational, and additional commercial facilities are readied for use. Although, we can expect to see a slowdown in fill rates in 2016 as more capacity is utilized, and it is prudent to keep in mind that phase 2 construction has yet to be completed, and only a fraction of phase 3 capacity is available, which means an additional amount of over 200 million barrels of crude capacity available in the next few years, out to 2020.
So, what's the impact on markets?
Given that the oil market itself has around 2 million barrels per day of excess supply, Chinese SPR demand is providing a cushion, but not a huge one. Prices may drop when these imports are completed; however, it will not be catastrophic to the market, and will most likely come when the market is at last beginning to move in the other direction.
Due to the approximate amount of China’s excess imports to global oversupply, and to the probable shift in the markets, the ultimate impact of a decrease in Chinese SPR imports will be negligible when they begin tapering in 2016. This makes considerations of the SPR in China seem overblown when compared to decreases in overall Chinese, Asian, and global demand, which should be the focal points of any investor’s analysis, and not just China’s SPR.
By Ryan Opsal for Oilprice.com:
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