Chinese Crude Imports Driven by OPEC Debt, Not Local Demand

Published on 18 Oct, 2016

Crude Oil Market Analysis

China’s insatiable thirst for crude oil imports isn’t due to a surge in consumption; it’s got more to do with a spot of luck that’s allowed the country to shore up its strategic petroleum reserves.

With an economy that’s just about stabilizing, China’s demand for crude could help oil stay afloat.

Chinese crude imports (volumetric) between 2014 and 2016 increase by a CAGR of 15%, arguably because of an upswing in domestic consumption.

While it’d be easy to assume China’s oil industry is just capitalizing on sagging crude prices, there’s a different dynamic afoot.

When oil prices were soaring around USD 110 per barrel between 2012 - 2014, many OPEC nations took out oil-collateral loans from China, agreeing to repay by exporting an equivalent quantity of oil to the People’s Republic.

Expecting oil prices to stay steady, the borrowing nations didn’t see a necessity to set a fixed price for payback, defaulting to prevailing market prices instead.

With oil prices falling by 50-60% since their agreements were put in place, these countries now owe China double what they would have if prices hadn’t plunged.

Underdeveloped oil exporting countries such as Venezuela, Angola, Nigeria, Iraq, and Kurdistan together owe China anywhere between USD 30–50 billion, a debt to be repaid in oil.

For every USD 50 billion they owe, borrower countries would have had to export nearly 1.2 million barrels when oil was trading at USD 110 per barrel. With current prices hovering around USD 45 per barrel however, they’ll now have to ship more than twice as many barrels to China in order to honor their agreement.  

This disparity is the biggest factor that’s driving crude exports to China.

China Is Using the Windfall to Stockpile Surplus Crude

With half-priced stock and twice their initial debt, the OPEC’s double whammy is a bonanza for China’s Strategic Petroleum Reserve (SPR).

The Chinese government has been rapidly diverting surplus oil imports towards state-owned SPR tanks since Q4 2014, a reserve that could satisfy the nation for 53 days or more.

The country’s surplus stores seem to be at capacity however, with China registering a slight decline in crude-oil import over the past few months.

With government reserves reaching maximum capacity and growing congestion at her major ports, China is now leveraging local private players in order to soak up excess crude and accommodate more imports. The Chinese government has passed a mandate compelling private companies to hold oil reserves, caches that can only be used subject to the government’s guidance or approval.

With Crude Prices Fickle, Waning Chinese Demand Could be Worrisome for the Oil Industry

There’s only so much surplus China can stockpile before drowning in its own hoard.

With several industrial sectors slowing down due to economic uncertainties, domestic crude consumption is waning. It’s just a matter of time before China runs out of places to park its surplus crude and the beeline of obligatory oil-tankers heading there thins.

Although the OPEC is doing what it can to inflate oil prices to their heyday levels, it’ll be some time before there’s any appreciable rise in crude prices.

Anyone betting on Chinese crude consumption to brace oil prices ought to reevaluate their options.