Yves here. Notice the geopolitical implications at the end of the piece.
By Zainab Calcuttawala, an American journalist based in Morocco. Originally published at OilPrice
Dwindling Chinese oil production could lead the Organization of Petroleum Exporting Countries (OPEC) to delay a freeze deal further, as the Asian giant ramps up its own imports to make up for lost domestic supply.
China, which was ranked as the fifth-largest oil producer in the world during 2015, reported a production rate of 3.87 million barrels per day in August—the lowest since December 2009, and the second consecutive month of sharp declines, according to Forbes.
Markets will have to reach an oil price of $60 a barrel before Chinese energy companies can grow production operations back to previous highs, analysts speaking to Bloomberg have said.
Even in 2015 –a year when oil prices were thought be on the road to recovery after the 2014 crash – Sinopec reported that it slashed oil and gas production.
As China’s middle class booms, the demand for energy has been and will be soaring with it. By 2022, McKinsey and Co. estimates that approximately 76 percent of the country’s urban population will be considered middle class.
The China National Offshore Oil Cooperation (CNOOC) can see profits at barrel prices above $41 a pop on average – a figure almost 40 percent higher than the break-even point of select Middle Eastern outlets who can still viably produce in a $25 a barrel market.
Around 15 percent of the oil that China purchases from foreign sources comes from Saudi Arabia – the de facto leader of OPEC, who’s regional rivalry with Iran caused two major efforts at implementing an oil production freeze to fail.
Though Saudi Arabia and its fellow OPEC members have agreed to discuss the terms of a deal in the weeks leading up to their official meeting in Vienna at the end of November, the Chinese government’s perspective as a distant observer of the bloc’s internal banter does not give it much power to improve its companies’ prospects.
As a group, OPEC controls 40 percent of oil exports while China, on its own, contributes far less to the international markets.
The biggest corrective action the Chinese government can take at this point is to make mass purchases of the cheap crude flooding the market. And the latest numbers from country’s storage facilities suggest that is precisely what the government has been doing.
Using satellite imagery of China’s oil warehouses, Silicon Valley start-up Orbital Insight Inc. calculated that the country had roughly 600 million barrels of oil in storage as of May – a figure that exceeds existing estimates by roughly one-third.
“I’m not surprised,” Michal Meidan, an analyst with London-based consultancy Energy Aspects, said of the new estimate. “There is more storage available in China than the market is willing to acknowledge. Any information around this is valuable.”
In total, China maintains 2,100 commercial storage tanks capable of storing 900 million barrels in total, according to observations made from the satellite imagery.
If OPEC and Russia fail to come to an agreement in November, the member states that compete to supply energy to China – notably Iran, Saudi Arabia and Russia – will economically benefit from the China’s falling domestic oil production.
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Risky assumption in italics:
Stock increases may well be due to falling demand and storage for refined products
does not lead to this conclusion automatically.
Earlier the article notes stock went up because demand in China is falling, and production levels were cut. Thus cutting domestic production isn’t likely to lead to any increase in China’s imports,
This only goes if the author’s assumption that oil remains cheep and China’s leadership may prefer to import crude rather than use up more expensive domestic oil field reserves.** The problem with this assumption is China is already bleeding Forex like mad, and the RMB still isn’t’ a contract instrument for overseas oil purchases. Further, China is using it’s RMB stimulus spending to wean off of both oil and coal, plus I don’t see much sunshine in the oil production economy for the near future, not if it depends on China. Thus the author may be right, but for now it’s far to early to tell if it’s wishful thinking/attempts to prop-up a long position.
**China’s elite has an almost pathological even irrational hatred of imports, going back at least to Qing/Ming Dynasty. A far more reasonable argument to me than just economics/pricing is China’s government could reverse policy, might want to keep that oil stored in the ground relatively safe against surprise attacks, as a hedge against blockade in the South China Seas. This might be seen as another sign that Xi is preparing for the possibility of either war thrust on him or started for his own purposes. Any opportunity to wean Saudi Arabia off the USA is secondary, and complicated, as it would be hard to balance against Iran which sells cheap to China.
Building a lot of storage to take account of low prices was a logical strategy for the Chinese. Even without CCP guidance, using cheap money to hoard commodities is a common strategy for Chinese companies to deal with periods of weak demand.
I suspect the Chinese strategy is to keep some production capacity spare and to store as much as possible, along with cultivating multiple suppliers of crude to allow the country to ride out oil price spikes or sudden shortages caused by geopolitics. Among other things, this makes China less vulnerable to Opec pressure. In any event, Opec seems pretty much finished as an organisation, it just provides cover now for whatever the Saudi’s and Russians are deciding to do anyway.
The IEA lowered its oil demand forecast once again, dropping demand growth for 2016 to 1.2 million barrels per day. In September it expected growth of 1.3 mb/d, which in turn was down from the 1.4 mb/d estimate in August. Two consecutive months of downgrades to its demand figures come as the agency sees “vanishing OECD growth and a marked deceleration in China.”