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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Forget OPEC, China Controls Oil Prices

China

U.S. shale has taken a lot of headline space recently as the biggest headwind for oil prices and the highest stumbling block for OPEC’s efforts to prop them up by cutting production. Yet, there may be another factor that could bring down oil prices as soon as next year…

China.

China has been building a strategic crude oil reserve for the last decade, but the size of that reserve remains undisclosed, with analysts making estimates based on China-bound cargoes and satellite imaging.

Last year, a Silicone Valley tech company, Orbital Insight, suggested that China may have stored as much as 600 million barrels of crude by May. This was the highest reserve estimate at the time. Since then, the reserve has in all likelihood grown, possibly exceeding the U.S. SPR, which stood at 678.9 million barrels as of August 18th this year.

This year, Chinese crude imports have run at record-breaking rates, with the average daily on par with what the U.S. imports, at about 8 million barrels, the Financial Times notes in an analysis. A lot of these, however, are going into storage tanks, analysts believe, and they warn that soon the tanks may fill up, wreaking havoc on prices and--more notably--on OPEC.

The cartel, Russia and 11 other producers agreed last year to remove 1.8 million bpd from global oil supply in an attempt to raise prices above US$50, with hopes for at least $60. This May, they agreed to extend the cuts to March 2018. Nevertheless, prices have remained largely stable around the $50 mark because of rising U.S. output, which last week jumped above 9.5 million bpd, according to the EIA. Related: Qatar Aims To Ease Its Reliance On LNG Exports

Chinese imports have played the counterweight, this year rising at a rate double the usual one, according to RBC Capital Markets’ head of global energy strategy, Michael Tran, as quoted by the FT.

What is most alarming is this: If the rate of imports slows down from the current 1-million-bpd, prices are bound to take a hit. The chance of the growth rate falling is quite big – last month imports slumped to the lowest since the start of the year, at 8.16 million bpd.

Analysts from FGE Energy have bad news for the oil industry. They have estimated, the FT says, that the growth rate of crude oil imports in China will slow down to 700,000 bpd in the second half of this year. For next year, the forecast is gloomier: imports will only increase by 100,000 bpd as Chinese producers expand their output abroad and even at that rate of increase the country’s strategic reserve could be filled to capacity by the end of the year.

Now let’s remember that OPEC and Russia have agreed to pump less until March 2018. Nobody knows what will happen after that, and while some experts are calling for the cartel and its partners to continue producing less for a longer period of time, it’s doubtful if everyone would be on board with this idea. In fact, we may well see taps being turned on again. It may be time to start considering the possibility of $20 oil again.

By Irina Slav for Oilprice.com

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  • Jeffrey J. Brown on August 23 2017 said:
    Based on EIA & BP data, what I define as Global Net Exports of oil (GNE*) have been below at or below the 2005 rate of 45 million bpd for 11 straight years, while the Chindia region has consumed an increasing share of flat to declining GNE.

    The volume of GNE available to importers other than China & India, what I call Available Net Exports (ANE), fell from 40 million bpd in 2005 to 33 million bpd in 2016.

    *Combined net exports (total petroleum liquids) from the 2005 Top 33 net oil exporters.
  • Steve on August 24 2017 said:
    Yeah more like 60 oil or higher is coming. I would cover your short bets and go long. The general public is always the ones to get screwed in the end and that will be with higher oil prices possibly much much higher.
  • Josh Gregner on August 24 2017 said:
    I think we need to indeed consider a perma-oil-glut coming at some point in time: Diesel is pretty much flat in China, Diesel is dying the rest of the world, Diesel growth in India is lackluster. And the gasoline growth in China will soon stop (8% EV mandate hitting in less than 5 months). At the same time Solar is killing Diesel generated power, EVs will start to make an impact just like CNG driven light and heavy duty vehicles. OECD countries are pretty flat as their markets are saturated and fuel efficiency standards cause a small decline.

    Oil is far from dead but we were already at pretty marginal growth rates and may soon see a gradual decline in oil demand.

    The thing is: once oil demand starts to contract prices will fall. So the question is? Do you pump now at $50? Or do you pump later at $35? And what will happen if everyone decides to pump now?
  • Oilracle on August 24 2017 said:
    Oil prices?
    Forget OPEC, forget China...
    Mind the U S A !
  • eli on August 24 2017 said:
    Oil is a giveaway at these prices. Snap back is coming down the pipe.
  • Bill Ferguson on August 24 2017 said:
    What no one is mentioning is that for the past 2.5 years investment worldwide for new reserves have dramatically fallen, and the effect on stockpiles will be adjusting
  • pinki on August 27 2017 said:
    Nobody mentioned the daramatic move china is doing away from fossil . WW leader in solar electricity production and ww leader in electric car production. today it impacts 1% of the market' but it grows fast. when its 10% -opec will not control prices any more.
  • John Brown on August 28 2017 said:
    Despite significant production cutbacks by OPEC with cooperation of other producers like Russia the glut of oil on the world market continues to slosh around. U.S. production continues to increase, and even if the increase slows everybody knows that new technology has reduced production cost and production can now be brought to market in months rather than years.
    Despite the glut of oil the industry and everyone involved have done a masterful job of sustaining prices by constantly changing the focus to U.S. inventory, or some problem someplace in the world.
    However, the fact remains that the glut remains, OPEC has had to idle more and more production and still not reduced the glut while readily available production capacity is sitting idle and continues to increase, and now we find what the industry has to know, that Chinese demand has been propped up by their purchases for their strategic reserve, and next year as they run out of storage capacity their demand could fall substantially.
    You have to hand it to the industry that has managed to keep prices around $50 all year even though there is no reason oil should be above $30 a barrel. My only question is that isn't that self defeating? The longer oil is artificially held up at $50 a barrel the more non OPEC production grows, and the more idle capacity increases. What exactly would justify keeping oil at $50 a barrel or even higher with so much oil and capacity available? Especially if Chinese demand falls because they've store oil up to their eyeballs, and can't store any more?

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