China is building oil reserves - and a few global factors explain why, assalamu alaikum
Assalamu alaikum. There's an interesting puzzle in the global oil market. This year China has been buying a large amount of oil imports, filling tanks and underground storage. If it hadn't, prices would likely be lower. But why is China accumulating oil it doesn't seem to need right now? How much more will it keep buying, and for how long?
Part of the difficulty is that China doesn't publish storage capacity or detailed volumes, so observers estimate. Aboveground tanks can be tracked by satellite, but more capacity is being built underground. You can also approximate what goes into storage by comparing imports plus domestic production with how much is refined. These numbers have uncertainties - for example, how much crude comes by pipeline from Russia versus by tanker, and how much small refineries or petrochemical plants process.
By August, it looks like China added stocks at a pace of at least 500,000 barrels per day. Estimates put total storage anywhere from about 800 million to 1.4 billion barrels - a big range. That equals roughly 73 to 127 days of oil imports. For context, many countries aim for reserves around 90 days of net imports as a buffer.
Official voices suggest state reserves could top 1 billion barrels, and some comments indicate a possible aim of 2 billion. There's room to keep filling: one large state company said storage was about 70% full. China is also expanding capacity - state firms plan to add many millions of barrels of storage across several sites this year and next, and private projects add more. The pace of building has been accelerating.
This matters. Opec+ increased output by about 1.2 million barrels per day from January to August, and China’s purchases appear to have absorbed nearly all of that extra supply. That helped stop prices from falling further. Much of the global inventory rise is accounted for by China and by “oil on water” - crude tied up on tankers because of sanctions on some producers and longer, detouring voyages.
Why is China doing this? There are several plausible reasons, and they can overlap:
- Commercial: Oil prices are below long-run averages, so traders buy while it’s cheap - especially discounted Iranian and Russian barrels when available. But storage costs mean this trade isn't always profitable just on paper. Still, the total bill is affordable for a big economy.
- Risk mitigation: Beijing may worry about tighter sanctions or trade restrictions, so building strategic stocks is a form of insurance. Holding dollar-priced energy domestically reduces some exposure to external financial pressure.
- Preparing for supply disruption: Some see this as hedging against a potential blockade or wartime cutoff of sea routes like the Strait of Malacca. Even as transport electrifies, militaries and some industries will still need fuel.
- Security concerns: A more extreme idea is that reserves could be for preparations if conflict were considered, though an immediate invasion of Taiwan seems unlikely to many analysts.
Looking ahead, if China keeps buying at least 500,000 barrels per day over the next few years, it will continue to support prices without necessarily creating extra tension. At a higher pace, say close to 900,000 barrels per day, it would help Opec+ keep raising output without driving prices down.
Most forecasts still point to a global surplus next year even with ongoing stockpiling, but if a supply shock occurs, Chinese reserves would be important in easing a price spike. The precise mix of commercial, strategic and geopolitical motives may remain unclear, but oil exporters are unlikely to mind.
May Allah grant stability to markets and safety to peoples. Wa alaikum assalam.
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