$20 Oil? Forget OPEC, China Controls Oil Prices

Authored by Irina Slav via OilPrice.com,

U.S. shale has taken a lot of headline space recently as the biggest headwind for oil prices and the highest stumbling block for OPEC’s efforts to prop them up by cutting production. Yet, there may be another factor that could bring down oil prices as soon as next year...

China.

China has been building a strategic crude oil reserve for the last decade, but the size of that reserve remains undisclosed, with analysts making estimates based on China-bound cargoes and satellite imaging.

Last year, a Silicone Valley tech company, Orbital Insight, suggested that China may have stored as much as 600 million barrels of crude by May. This was the highest reserve estimate at the time. Since then, the reserve has in all likelihood grown, possibly exceeding the U.S. SPR, which stood at 678.9 million barrels as of August 18th this year.

This year, Chinese crude imports have run at record-breaking rates, with the average daily on par with what the U.S. imports, at about 8 million barrels, the Financial Times notes in an analysis. A lot of these, however, are going into storage tanks, analysts believe, and they warn that soon the tanks may fill up, wreaking havoc on prices and--more notably--on OPEC.

The cartel, Russia and 11 other producers agreed last year to remove 1.8 million bpd from global oil supply in an attempt to raise prices above US$50, with hopes for at least $60. This May, they agreed to extend the cuts to March 2018. Nevertheless, prices have remained largely stable around the $50 mark because of rising U.S. output, which last week jumped above 9.5 million bpd, according to the EIA.

Chinese imports have played the counterweight, this year rising at a rate double the usual one, according to RBC Capital Markets’ head of global energy strategy, Michael Tran, as quoted by the FT.

What is most alarming is this: If the rate of imports slows down from the current 1-million-bpd, prices are bound to take a hit. The chance of the growth rate falling is quite big – last month imports slumped to the lowest since the start of the year, at 8.16 million bpd.

Analysts from FGE Energy have bad news for the oil industry. They have estimated, the FT says, that the growth rate of crude oil imports in China will slow down to 700,000 bpd in the second half of this year. For next year, the forecast is gloomier: imports will only increase by 100,000 bpd as Chinese producers expand their output abroad and even at that rate of increase the country’s strategic reserve could be filled to capacity by the end of the year.

Now let’s remember that OPEC and Russia have agreed to pump less until March 2018. Nobody knows what will happen after that, and while some experts are calling for the cartel and its partners to continue producing less for a longer period of time, it’s doubtful if everyone would be on board with this idea. In fact, we may well see taps being turned on again. It may be time to start considering the possibility of $20 oil again.

Comments

post turtle saver (not verified) oak Thu, 08/24/2017 - 11:21 Permalink

no, because oil that cheap translates to a really strong USD...it also means that the markets will have to align with that fundamental... "da mental fun" has just begun...

In reply to by oak

Epimetheus post turtle saver (not verified) Thu, 08/24/2017 - 11:45 Permalink

The strong/weak dollar to oil price connection hasn't been posted yet on zerohedge..... strange. https://www.thebalance.com/how-the-dollar-impacts-commodity-prices-8092… If for example, everyone wants to rid themselves of dollars. Buying oil would be the logical first step.If for example, everyone wants to rid themselves of dollar based US TREASURY BONDS. Buying oil would be the logical first step. If the debt ceiling passes, the dollar bubble grows. If the debt ceiling fails, the dollar bubble pops. Lose-Lose for the dollar long term.

In reply to by post turtle saver (not verified)

Mr 9x19 post turtle saver (not verified) Thu, 08/24/2017 - 12:37 Permalink

a really strong USD would pair with euro, it is not the case. low oil only mean one thing,  consumption is falling in the interstellar void, there is no consumption at all and it is conjugated with tech improvments reducing the needs also on it's side. i told you all for months before i get banned and i keep saying it on this account, oil era is done.it is no longer the concern of the economy. it is nat gas, and  in about 15 years, water.oil is done.anyone  long on coal just missed the point. usa & china will have nice seneca cliff soon.it is just buying time.

In reply to by post turtle saver (not verified)

Gohigher Thu, 08/24/2017 - 11:11 Permalink

Oilstupid.com
What a worthless rag......
Must have hired some English major copy editors ! Cheap !!

"" Last year, a Silicone Valley tech company,""

you just can't make this shit up, its real.

Erek Thu, 08/24/2017 - 11:12 Permalink

With the US war mongering all over the world, it may be prudent for some countries to build oil reserves - just in case.

Consuelo Thu, 08/24/2017 - 11:13 Permalink

  Nice place to be when you're manufacturer to the world.   Plenty of cheap oil to energize the factories, silk-road trains & trucks, and European automobiles.For 'service economies' - eh, not so much...

post turtle saver (not verified) Consuelo Thu, 08/24/2017 - 11:24 Permalink

... unless your "service economy" is the USA... which, if you dig into the numbers, isn't really a service economy...cheap oil / strong USD = massive US purchasing power... I know this is the doom porn site for the USA but realistically this is excellent news for the US consumer and economy in general... the real economy, mind you, not the stock market BS...

In reply to by Consuelo

LawsofPhysics Thu, 08/24/2017 - 11:15 Permalink

LMFAO!!!! Have people really become this fucking stupid. If you are going to PRICE THE OIL IN DOLLARS,  then you need to ask yourself who/what controls THE DOLLAR!!!!! Did this asshat mean to say "20 YUAN OIL"...?!?!?Fucking idiot. 

falak pema Thu, 08/24/2017 - 11:20 Permalink

Thats good for the consumer; but as we all know the dip won't last more than one or two years-- Max 10 years if we hit a depression..And for all those who think the Yuan will replace $/Euro totally in two years you gotta be joking.Given the tie-in between China and Euro/$ markets it'll take 20 years for Yuan to be top dog.This is now a 20 year type paradigm change; unless someone hits the red button!

assistedliving (not verified) Thu, 08/24/2017 - 11:37 Permalink

yup, been saying all along watch China "teapots" and Commie regulations.guestimate 30% impact on crude prices

Hubbs Thu, 08/24/2017 - 11:42 Permalink

My understanding is that unlike refined gas to which additives like stabil must be added to preserve its useful life from one to 3 years before it goes bad, crude oil can be stored indefinitely, as it has been for millions of years underground before it needs to be refined.

Forget China buying up gold.

If China can afford to build bridges and cities to nowhere, then it has probably figured out it is better to build crude storage tanks instead.

Hubbs Yukon Cornholius Thu, 08/24/2017 - 13:11 Permalink

I guess we'll find out if they keep building more facilities...maybe a year's worth of storage? It's kind of like being able to outrun the bear, you don't need to do that, just be able to outrun the slowest guy in your group, or on an even more macabre scale, you don't need one year's food preps, only 3 month's worth, just enough to outlast the vast majority who have none and starve to death. If China can outlast the other economies that would starve/collapse without oil after 3-4 months, then China would have a huge strategic advantage as being the only show in town...kind of like the US was after WW II. However,  having said that, I find Steve at www.srsroccoreport.com and the Hills Group theory very interesting in that  regardless whether oil becomes scarce because of lack of discovery,  increased EROEI  costs of drilling, refining, or supply is disrupted because of war or unserviceable debt by shale oil drillers,  or even big  traditional producers like Exon, the multiplier effect on  demand destruction that is faster and greater than the decreasing supply of oil creates a paradox where oil remains at low prices.  The reverse of  traditional supply and demand economics.

In reply to by Yukon Cornholius

Dragon HAwk Thu, 08/24/2017 - 11:44 Permalink

Um, isn't a field full of Oil storage tanks, considered a big fat War Target?  they sure were in WWII  I Know I Know we are in an Economic War. not a Hot One.. ( yet )

spoteuro Thu, 08/24/2017 - 11:49 Permalink

can anyone doubl check? The article first mentions 8m pbd imported by China, on pace w/ the US, and then it says 1m bpd. Maybe I missed something?