At the end of August, we did a follow up article on what we believe is a far bigger marginal driver to the price of oil than OPEC production (which may or may not be reduced by up to 750kbpd in November), namely the Strategic Petroleum Reserve of China, a major importer of oil in recent years, along with India, taking advantage of low prices and largely supporting global oil demand growth at a time of rampant oversupply, and which we profiled most recently in "A Chinese "Mystery" Has Become The Biggest Wildcard For The Price Of Oil."
The simplest reason why Chiina's SPR capacity (and storage) is of key importance, is that it determines the ongoing demand China has for oil - of which much ends up in storage - and also allows analysts to calculate how much more oil China would need, in order to fill up its SPR. While China has traditionally kept any data about its SPR inventory as opaque as possible, in a rare release this month, Beijing reported adding about 43 million barrels of crude to its strategic reserves between mid-2015 and early this year. Reserves totaled 31.97 million tons in early 2016, equivalent to about 234 million barrels, the National Bureau of Statistics said in a statement that was the first government update on reserves since December.
A guard stands before the oil SPR tanks at Zhoushan
As Bloomberg confirmed, emergency stockpiles of the second-biggest oil user have been a source of speculation among analysts and traders, who rely on customs figures and infrequent construction updates to estimate how much of the country’s imports go into strategic inventories, and for how long they will continue to fill.
A few days ago, S&P discussed the critical topic of Chinese reserves, when earlier this week, Jodie Gunzberg, global head of commodities at S&P Dow Jones said at a S&P Global briefing on oil markets in London that "regardless of what happens on the supply side, there's this wildcard factor of the strategic petroleum reserves." Oddly, she used our precisely wording.
As she further explained, "now that China has bought so much cheap oil to fill their SPR, which nobody really knows how much there is (in it), if OPEC does freeze and tries to bring the price back up, China may push it back down because they might choose not to buy it at a higher price and just choose to use their SPR or start exporting it themselves - like they did with other commodities."
"So I feel that that is, right now, more of a factor influencing how long the low oil prices might stick around," Gunzberg added.
Not only that but as JPM estimated earlier in the year, the closer China gets to filling its Chinese SPR, logically the less its import demand for crude will be, and as a reminder, JPM speculated that we are now approaching a period when - according to the bank's calculations - Chinese SPR will proceed to rapidly wane, effectively offsetting any supply reduction by OPEC. As we reported in June, JPM estimated the country built up a total of about 400 million barrels by mid-2016 out of a targeted 511 million barrels.
Perhaps the reason why JPM's concerns that China was approaching its SPR capacity dissipated, is that when China revealed its far lower number in SPR storage earlier in September, it telegraphed that it has much more "pent up demand."
However, in retrospect it appears China may have been lying, again.
According to satellite images by geospatial analytics startup Orbital Insight, China, has not only misrepresented how much oil it has stored, it has done so at a massive scale, with the real number dwarfing even JPM own estimate: the real amount of Chinese oil in storage, according to Orbital, was a whopping 600 million barrels as of May. Assuming JPM's estimated rate of SPR accumulation of about 1mmbpd, the 600 million number as of May would have grown to well over 700 million barrels as of September.
Orbital’s figure as first reported by Bloomberg, is well over two times larger than China’s official estimates for strategic petroleum reserves and for commercial stocks, said Orbital Chief Executive Officer James Crawford.
There were about 2,100 strategic and commercial petroleum reserve tanks capable of storing 900 million barrels as of the end of 2014, according to calculations derived from photos tracking the depth of shadows visible on top of the floating lids of the giant tanks. They don’t include underground caverns.
The company's estimates also exceed projections from forecasters including Energy Aspects Ltd., and help shed light on oil reserves that puzzle commodities traders worldwide. China’s record purchases this year have helped oil prices recover from the worst crash in a generation.
Bloomberg also notes that "the findings are also the latest example of how private technology firms are using big data and machine learning to better measure the second-largest economy, where some official data are incomplete and private gauges have vanished without explanation." That is a polite way of actually getting some data out of China that isn't totally made up.
So why are China's vastly greater than admitted SPR holdings important, especially in the aftermath of the OPEC "deal"? As Dave Ernsberger, global head of oil content at S&P Global Platts, told the S&P briefing, China's SPR is a challenge for markets. "The SPR in China is one of a number of unknown factors that mean you can never get too comfortable assuming any set of circumstances in the global oil markets."
He said the exact size of China's SPR was unknown, however, making it a risk that was hard to quantify.
"It never suits any buyer, or bulk buyer, to flag to the market how much they want to buy so we're likely to get a lot of misinformation around that for quite some time to come. SPRs are strategic, as the name suggests, so the government isn't going to talk about it."
Which explains why China has been so eager to keep its true SPR holdings secret or simply misrepresent them.
Furthermore, while China might have millions of barrels of oil stockpiled for either its own emergency use or to sell, demand growth from the country is ebbing. The IEA warned this month that "recent pillars of demand growth China and India are wobbling." S&P Global Platts' Ernsberger, cited by CNBC, said that the slowdown in Chinese demand was worrying for major oil producers.
"The demand picture is very unsettling for OPEC and for all producers of crude and refined products (and this is seen most significantly in) the slowdown in growth in the Chinese market. China has returned more incremental demand for the oil market in the last five years than any other country in the world and more than almost any of the counties combine. But this year demand growth in China has stalled and that represents a significant change in the environment for producers both in OPEC and outside it."
"The successors to China who will pick up the slack in demand growth aren't quite of a size yet to have the impact that Chinese growth has had. So the demand picture is fairly frightening from a producers' point of view."
Which, much more than anything, is why OPEC was "willing" to reach a production cut (non) deal: it is aware that its until recently fastest growing client is about to slam the brakes, and the only option for Saudi Arabia and its minions was to produce less ahead of this inflection point. That said, with both supply and demand declining, the overall impact on price will be virtually nil, unless of course price does go up, in which case US shale production is about to go into major overdrive.
And speaking of shale, US producers are already scrambling to take advantage of the recent price spike: as Bloomberg reported moments ago, OPEC is “is throwing a lifeline” to U.S. shale oil producers who have sought to hedge production due to the price rise spurred by the group’s deal Wednesday to cut output, BNP Paribas head of commodity strategy Harry Tchilinguirian said by phone. “What this OPEC meeting has done is actually throw a lifeline to producers, and in particular U.S. shale oil, that as a result of the spot move and the move in the rest of the curve have come in in droves to hedge production,” Tchilinguirian said.
Tchilinguirian says BNP has "seen many queries coming through as a result of the OPEC decision” which has lifted the WTI curve “to levels acceptable where U.S. producers can hedge."
Which is good news for shale and gas consumers, and bad news for Saudi Arabia. OPEC, the petrodollar and risk assets.