China capitalizes on the moment and stocks up on crude oil

China is taking advantage of the plummeting price of oil, which fell below zero on Monday, purchasing vast amounts to add to their stockpiles.

For the first quarter of the year, even while the economy battled with the coronavirus outbreak, imports of oil were up 5%.

What happened?

The drastic drop in oil prices has been spurred on by two main factors. The first is a lack of global demand – due to economies all around the world being on lockdown over the coronavirus pandemic – and the second is a result of excess supply caused by the price war between Saudi Arabia and Russia. The price war was an initial attempt by the two countries to claim a larger share of the market but that resulted instead in the market being flooded with excess oil, driving prices sharply down.

Although OPEC members and their allies agreed to cut oil output by 10% in order to try to stop oil prices from free-falling, this measure won’t come into effect until May.

Why is Beijing stocking up?

Beijing has long had a policy of not being overly reliant on imported oil, citing such reliance as a security risk. To this end, the Chinese government has invested billions in energy sources like hydro, wind and solar power.

However, the steep drop in oil prices has enabled the country to stockpile oil. The Communist Party’s Political and Legal Commission has stated on its social media account that the low prices “have a positive impact on China.”

From a Chinese security perspective, the increased stockpile provides the country with protection from any possible supply disruptions in the future.

While it is still unclear if the Chinese government purchase of crude oil is being used to increase their strategic stockpile, speculation is rife.

According to Peter Lee, the senior oil and gas analyst for Fitch Solutions, China’s official reserve capacity is around 385 million barrels. If enough additional storage capacity exists, China would have the ability to import an additional 500,000 to 900,000 barrels per day for its strategic reserve, or approximately 5% to 9% of the country’s total foreign purchases.

However, the Communist Party commission has not made it clear whether this is the case, only stating that now was an opportune time to buy oil.

In the middle of March, as the price of oil around the world was falling, China is reported to have sent 84 tankers to Saudi Arabia, each with the capacity to carry 2 million barrels.

China’s oil consumption and production

The outbreak, which resulted in factory closures and forced people to remain in their homes, has already had a tremendous effect on the Chinese economy. Reports for the first quarter of the year show that the economy contracted 6.8% from the same period last year.

In 2019, China was responsible for five percent of the world’s oil production, with a production rate of 4.89 million barrels per day. However, the country consumes about 14 percent of the world’s oil, approximately 13.57 million barrels per day.

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