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Business News/ Markets / Commodities/  China offers oil reserves in unprecedented move to cool rally

China offered millions of barrels of oil from its strategic state reserves this month in an unprecedented move to try and quell inflation brought on by rising costs of everything from food to fuel.

The country will supply about 3 million tons -- or 22 million barrels -- to major refineries, according to people with knowledge of the matter, who asked not to be identified as the information is sensitive. The decision is the latest in a slew of measures by the world’s second-largest economy to rein in skyrocketing costs caused by a post-pandemic economic recovery.

Global benchmark Brent crude topped $75 a barrel in the weeks running up to the move, a level last seen in 2018, as a public spat between OPEC+ members delayed a crucial decision to raise output. While the alliance ultimately agreed on a deal to boost supply to a market tightening from rebounding demand, oil prices remain almost 40% higher than at the start of the year.

The release of reserves could weigh on China’s consumption of imported crude, even though details on timing remains unclear. The nation’s overall demand for foreign oil hinges on major refiners, after private processors took a hit from increased government scrutiny that included the rollout of tariffs, which eroded profitability.

The plan was first reported by Energy Intelligence. No one answered calls to the press office of China’s National Food and Strategic Reserves Administration, which oversees the oil reserves. There was also no response to a fax sent to the National Development and Reform Commission. The National Energy Administration was formerly responsible for the reserves.

Mixed Reaction

Since early-2021, Beijing has ramped up efforts to control surging prices that have seeped into everything from the cost of power to daily meals. Raw material costs are up on a strong economic recovery from China to the U.S. to Europe, as well as virus-related labor and supply-chain woes. Beijing has gone after speculators and released state metals and coal stockpiles in a bid to prevent rallying prices from denting its own growth.

Read Also: China Starts a War on Commodity Prices Goldman Says It Can’t Win

These sales, however, have garnered mixed responses from the market. Since announcing the sale of stockpiled base metals including copper, aluminum and zinc on June 16, domestic futures prices have been little changed, or risen slightly. For grains, prices are down about 1.5% after China offered stockpiled corn on July 9.

The department in charge of non-oil commodity stockpiles said Wednesday that it will increase the amount of base metals it will sell by as much as 80%, compared with its previous auction, indicating it hasn’t given up its effort to stop the rally. Goldman Sachs Group Inc. and Citigroup Inc. say China’s actions to control prices will likely fail.

Oil Refiners

Brent has lost more than 2% since the start of the week, when speculation of the reserves release began, after capping a 2.6% weekly decline Friday. The sale of Chinese state oil reserves adds to other concerns stemming from the spread of the delta virus variant and a stronger U.S. dollar.

As for the major Chinese refiners that were offered barrels, Beijing’s move will help these processors avoid running short of crude amid a drawdown of their own stockpiles, which has occurred since the fourth quarter of 2020, wrote Energy Aspects Ltd. analysts Yuntao Liu and Amrita Sen in a note dated July 21.

Additionally, access to oil from state reserves will also support a ramp-up in refinery run rates as plants return from maintenance work, they added. Energy Aspects expects Chinese crude processing rates to increase by 430,000 barrels a day during the third quarter from the previous three months, up from an earlier forecast of 210,000 barrels a day.

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Updated: 22 Jul 2021, 11:40 AM IST
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