Global energy balance is a multifaceted issue with a number of important variables, not just one that impacts the overall balance.
While Chinese President Hu Jintao came in to the Kingdom earlier this week, he had a specific brief: China wants more oil. And specific agreements signed during the visit included enhancing cooperation in oil, gas and mining.
The energy aspect of the visit was interesting in more than one ways. It occurred at a time while the world is literally brimming with crude.
When former US President George W. Bush visited Riyadh twice last year with the same request, the environment was completely different.
Prices were going up and up, the US felt like doing something to rectify the scenario somehow. Bush thought of influencing the supply side of the balance as the easiest way out of the imbroglio. The world was different then in more than one sense.
Despite the recent tightening of OPEC’s taps, the world continues floating in crude. Inventories in the US, the world’s largest consumer, were seen growing by 700,000 to 900,000 barrels a day in January, the steepest rise in January in 85 years. At 346 million barrels, crude stocks are the highest since the 351 million barrels recorded in July 2007. Amid low prices, the US has vowed to fill its strategic petroleum reserves to capacity this year.
This is taking place while the early US data for January shows demand falling by 2.8 percent to 19.549 million barrels — the lowest for the month since 2002 and marking the 18th straight month of year-on-year declines. This has helped US crude inventories to balloon to the highest level in years. Demand destruction today seems more than offsetting the output cuts of OPEC, which is indeed alarming for the oil grouping!
And the glut is leading refiners to amass crude, too. Stocks are also projected to continue to rise. The EIA expects refinery runs in February and March to average 400,000 barrels a day below the current levels. And the considerably high level of floating storage — on the seas and oceans — is another known impediment impacting the global crude markets, rather adversely today.
And now with crude prices at abysmally low levels, China also seems to be embarking on the same path. Top energy official, Zhang Guobao, head of the National Energy Administration, in a rare recent piece in the People’s Daily newspaper, argued that China should take advantage of the falling global energy demand (and prices) to increase its oil reserves. Zhang said China would encourage companies to utilize idle storage capacities to increase inventories.
Though China doesn’t report its oil inventories regularly, analysts think Beijing has been building stockpiles for some time now. China has increased crude oil imports in recent months, and the increase of imports is certainly linked to the filling of its strategic reserve, says John Kingston, global director of oil at Platts. Paul Ting, a US-based energy analyst, estimates that about 25 million barrels of crude oil have been injected into China’s strategic tanks since August. It has been reported that China recently completed construction of four oil-reserve bases — together representing the first phase of its strategic oil-reserve plan, with a capacity to hold 102 million barrels of crude oil. China is now pushing ahead with the construction of the second phase, which could store an additional 170 million barrels, Zhang said in the article. In the next few months, China is likely to fill the fourth base — in Dalian — from the first phase, for 19 million barrels, says Kang Wu, a senior fellow at East-West Center, a Honolulu-based think tank.
Meanwhile, hundreds of non-state oil distributors and refiners in China are currently sitting on what could amount to more than one billion barrels of idle storage capacity, according to the petroleum distribution committee of the China General Chamber of Commerce. Oil companies in the mid-1990s built these massive storage facilities after China opened its oil markets to non-state and foreign players.
China’s inventory policy is a critically important factor in determining global oil price, says Ting. The US suspended adding oil to the emergency reserve in May 2008 after oil prices soared to over $100 a barrel. It is widely believed that China stopped its filling efforts after oil prices reached $70 a barrel around August 2007.
Initiative has definitely slipped out of the OPEC’s hands — at least for the time being. Each barrel of oil that goes into storage in consumer countries weakens the grouping’s hold on the market and potentially prolongs the price skid. OECD oil stocks currently stand at 56.4 days of demand, higher than OPEC’s target of 52 days and hence the skid continues.
The emerging price meltdown would definitely require still deeper cuts by the OPEC, and not increase as some are requesting today. President Hu’s request needs to be seen in the above background. Will it help the producers achieve their objectives is definitely another question.
