Will China’s record level of crude oil stockpiling run out of steam after the country’s historic currency devaluation?
That is a question that will hang over the oil market in coming weeks following the move by China’s central bank on Tuesday to set the official value of the yuan nearly 2 per cent lower against the US dollar.
It was the biggest decline since the modern Chinese currency regime was established in 1994, with the devaluation aimed mainly at reviving an economy that policymakers are worried will fall short of official forecasts of about 7 per cent annual economic growth this year. The devaluation was also intended to alleviate turmoil in China’s financial markets, which have been shaken by a sharp decline in prices of shares and other assets.
The currency move will potentially weigh on already weak worldwide commodity markets, many of which have been driven primarily by Chinese buying.
Chinese oil demand held up well this year, even as growth in the economy slowed.
A sharp rise in the second-quarter resulted in oil demand growth of 6 per cent annually in the first six months of the year.
“Chinese implied oil demand has actually responded well to the [oil] price plunge”, even while demand for other commodities has fallen, according to Sabine Schels, a commodities strategist at Bank of America Merrill Lynch. But that growth in demand has been driven by a number of factors, including the strong yuan itself, which has meant commodity prices have fallen relatively for Chinese buyers. Plus the fact the Chinese authorities have passed on lower crude oil prices in the form of lower retail fuel prices as part of the effort to encourage more domestic consumption and less reliance on exports for economic growth.
Oil demand growth, however, has been flattered this year by a splurge in buying to fill up China’s strategic petroleum reserve tanks.
China has another large expansion planned this year for strategic oil storage, from 100 million barrels at the end of last year to nearly 140 million barrels, then to 300 million barrels by the end of the decade to cover an estimated 48 days of imports.
In July, the country recorded a new monthly record for crude oil imports of 30.71 million barrels, according to the General Administration of Customs in Beijing. This was driven partly by state oil companies buying to fill a new strategic storage facility in the port city of Qingdao.
Private sector refiners also bought more oil after the government relaxed restrictions allowing them to import crude. However, strategic inventories of processed oil products – petrol, diesel, etc – also have been rising sharply, which may have exaggerated the country’s apparent demand.
In fact, according to Ms Schels, “adjusted for stock-building, demand growth is likely to have been a lot lower”, perhaps half of the 6 per cent this year.
Big questions for the market now are whether the stock building was done with foreknowledge that the yuan would be devalued, and whether that means it will slow down significantly in months ahead.
“I don’t think [the strategic buying] was coordinated well like that,” said Tom James, head of the energy consultants Navitas Resources. Rather, the buying was probably opportunistic. “The overall sell-off in crude was a great opportunity and many people now feel we are at, or close to the bottom, in oil prices,” he said.
Oil prices are still historically low, so that may be more important for Chinese buyers than the rise from a weaker yuan, said Amrita Sen, an analyst at Energy Aspects, a research firm.
“Given crude prices at $50, less than half of what it was a year ago, even with the devaluation crude remains incredibly cheap by historic standards,” she said.
China’s state oil companies “are fairly agnostic to prices when it comes to filling their [strategic petroleum reserve], in that once there is a mandate to fill it, they tend to go ahead with it regardless of price”, said Ms Sen. “Lower prices accelerate the pace of buying but China has even filled at $100 a barrel in the past, so it doesn’t put them off entirely.”
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