The U.S. is the world’s largest holder of emergency crude stockpiles, but now it’s selling off reserves, while China, the second-largest, is taking advantage of low crude oil prices to fill storage.
And earlier this month, for the first time in history, China bought crude oil from the U.S. Strategic Petroleum Reserves (SPR), scooping up 550,000 barrels for US$28.8 million. It’s not a massive purchase, but it is unprecedented.
So while China is stockpiling emergency reserves at a time when crude prices are low, the U.S. appears to have come to the view that its SPR is no longer a critical part of energy security, or a critical element in the case of disruptions. It is, after all, expensive to keep up this storage, and part of the reason for the U.S. sell-off is to finance the upkeep.
The oil price crisis has thrown everyone off balance, but only the U.S. is selling right now. This shows that the U.S. shale boom has changed the dynamics of the U.S. energy security policy.
Back in 1973-74, the fuel embargo, at a time of declining U.S. production, greatly affected the U.S. Hence, in 1975, the SPR was launched to safeguard the U.S. against any future supply disruptions. As of March 17, the SPR inventory held 693.4 million barrels of oil, which is below the all-time record of 727 million barrels of oil held in 2009.
Ideally, with oil prices trading below $50 a barrel, it’s a good time to buy, as China is doing. It is not only filling its storage tanks at these low prices, new storage capacity is also being added, thereby increasing the SPR. Related: OPEC Weighs Extension As Oil Markets Start To Lose Their Nerve
Though China’s push to store crude oil started relatively late in 2007, it has quickly ramped up its capacity. However, unlike the U.S., which regularly reports its data, the Chinese like to keep their SPR details a secret. Hence, most of the information available about China’s SPR is only an estimate, and different agencies have arrived at different figures.
According to a June 29, 2016, research note by JPMorgan Chase & Co. analysts, including Ying Wang, the Chinese had built around 400 million barrels of capacity by the middle of last year, compared to its target of 511 million barrels.
(Click to enlarge)
Japan, the third largest SPR holder at about 324 million barrels, has neither added nor sold its stockpile aggressively in this oil crisis. It probably considers the current levels sufficient to tide through any temporary disruption, hence, has maintained status quo.
Though South Korea’s SPR capacity is the fourth largest in the world, at 146 million barrels of oil, it doesn’t use its complete capacity for SPR purposes. 92.6 million barrels is used for SPR; 26.6 million barrels of foreign oil is stored under various agreements; Korea National Oil Corp. trades use up 5.9 million barrels, and 800,000 barrels are for other commercial uses.
South Korea, however, has also taken advantage of low crude oil prices and increased its allocation for SPR purchases from Won 54.9 billion in 2015 to Won 90 billion in 2016.
Next in line is Spain, which has a capacity of 120 million barrels. It has also maintained status quo, holding 90 days of average domestic consumption in SPR, according to the EU policy.
Although it is not among the top five, India also plans to quickly ramp up its SPR to meet 90 days of net import coverage. Currently, Indian reserves hold 39.1 million barrels of oil, and the government plans to add another 91 million barrels of capacity by 2020. Once complete, India’s SPR will be among the top 5.
An analysis of the above figures show that barring the U.S., all other nations are either maintaining status quo or are increasing their crude stockpiles. Related: Asia’s Top LNG Players Forming Buyers Club
But why is the U.S. selling?
Back in 2005, there was a call to increase the capacity of the U.S. SPR to 1 billion barrels of oil, however, as the shale boom took hold, many felt that the addition was not needed.
A U.S. Department of Energy report to Congress titled “Long-Term Strategic Review of the U.S. Strategic Petroleum Reserve” released in August of last year has suggested reducing the SPR from the current levels to a range of 530-600 million barrels, which is equal to about 60 days of supply.
The aging infrastructure of the SPR needs an upgrade at a likely cost of $2 billion, without which the facility might not be of any use in an emergency. Hence, Congress had passed a temporary bill in December to sell $375 million worth of oil from the SPR. The sale has been completed, and the major buyers are BP, which has purchased 5.4 million barrels of oil priced at $278 million, and Valero Marketing and Supply Co., which has purchased 1.6 million barrels priced at $83 million.
China has also purchased oil from the SPR sale through PetroChina International, the overseas trading arm of state-owned oil giant PetroChina, reports S&P Global Platts.
Another reason for the sale is that back in 2007, the U.S. imported about 6 million barrels from OPEC. But by 2015, imports from the oil cartel dipped to 2.9 million barrels. In a recent report, the EIA said that the U.S. could become energy independent by 2026.
"Yes, the U.S. could be completely, I think the phrase used at one time was energy independent," said EIA Administrator Adam Sieminski in a press conference announcing the report, reports the Time.
The U.S. is shielded to a large extent from any supply disruptions compared to the 1970s, hence, it is reducing its SPR. On the other hand, the remaining top 4 SPR holders are not yet energy independent, therefore, they are either maintaining status quo or are adding oil to their SPRs at the current levels.
By Rakesh Upadhyay for Oilprice.com
More Top Reads From Oilprice.com:
- Oil Prices Spike On Lower Than Expected Inventory Build
- What Is Putin Planning For Ukraine?
- There Is No Such Thing As Peak Oil Demand