China, the world’s biggest energy consumer, is building up stockpiles of crude oil as global prices plunge due to the coronavirus outbreak.
Imports rose 4.5% in March over a year earlier even as the world’s second-largest economy shut down to fight the virus and demand collapsed. For the first quarter of the year imports were up 5%.
The price collapse is battering state-owned oil producers and possibly disrupting official plans to develop the industry but is a boon to Chinese drivers and factories. It gives Beijing a chance to add to a strategic petroleum reserve that is meant to insulate the country against possible supply disruptions.
“In the midst of all this, China oil imports have been resilient, as low prices have enabled stockpiling,” said Peter Lee, senior oil and gas analyst for Fitch Solutions.
As global prices fell, Chinese importers sent 84 tankers to Saudi Arabia in mid-March, each able to carry 2 million barrels of crude, according to news reports that cited the China Shipbuilding Industry Association.
Low oil prices “have a positive impact on China,” said the ruling Communist Party’s Political and Legal Commission on its social media account.
Still, the plunge threatens to disrupt plans to make China more “energy self-reliant” if state-owned drillers have to cut spending on developing domestic oilfields, said industry analyst Max Petrov of Wood Mackenzie.
State-owned PetroChina Ltd., Asia’s biggest producer, is “probably losing quite serious amounts of money,” said Petrov. He said PetroChina has to decide whether to follow the lead of Western producers and slash spending on new wells.
“If it cuts investment, and because of the nature of China’s oilfields, it will take a very long time for production to come back up,” said Petrov. “It will take years and even more money.”
Beijing also appears to be adding to its strategic stockpile, though details are secret.
The Cabinet’s National Energy Administration reported in September that total reserves held by the government and oil companies were equal to 80 days of consumption.
The official reserve stands at about 385 million barrels, according to Lee of Fitch Solutions. He said plans appear to call for increasing that to 500 to 600 million barrels.
If enough additional storage capacity is built, the government might import 500,000 to 900,000 barrels per day for the strategic reserve, or 5% to 9% of China’s total foreign purchases, according to Lee.
The government reserve uses three tank farms and state media say a fourth might be under construction.
The energy administration referred questions to the Cabinet’s planning agency, the National Development and Reform Commission. The NDRC didn’t respond Wednesday.
The Communist Party commission said the plunge in prices gives Beijing a unique chance to build up that reserve but gave no indication the government was doing that.
“This is a once-a-century opportunity!” the commission said.
That might be hard to do, because like other countries China is running out of empty storage capacity, said Lei Sun of Wood Mackenzie.
The strategic reserve and private suppliers had filled up at least 85% percent of their total storage capacity by February and added more oil in March, according to Lei. He said space that is left might be filled up with crude bought earlier at higher prices that Chinese buyers are forced to accept even though they had no customers.
“I don’t think there is going to be any leftover space for crude,” said Lei.
Cheaper crude is one of China’s few economic bright spots in the coronavirus pandemic.
The economy suffered its worst contraction since the mid-’60s in the first quarter, shrinking 6.8% from a year earlier after Beijing closed factories and told some 800 million people to stay home.
Forecasters expect little to no growth this year, down from 2019’s 6.1%, which already was a multi-decade low.
That is politically risky for the ruling party, which bases its claim to power on associating itself with China’s economic success.
China’s two other major state-owned oil companies — Sinopec Ltd. and CNOOC — also are believed to be considering cuts in investment.
China has relied increasingly on imported oil and gas since the late 1990s as manufacturing, car ownership and airline travel boomed.
Imports make up about half of consumption. Half of that comes from the Middle East and the rest from Russia, Southeast Asia and Africa.
The ruling party wants to curb that reliance, which communist leaders see as a security risk. That is a major factor behind Beijing’s multibillion-dollar investments in hydro, wind and solar power.
