China is expected to resume building its
strategic oil reserves next year, a development that stands to speed up the
march toward triple-digit oil prices.
It is no secret that China
is building an emergency stockpile of oil akin to the U.S. Strategic Petroleum
Reserve, though the Chinese government is secretive about the timing for
filling its storage tanks. However, a growing chorus of oil analysts say the
next phase of China's
reserve building--an addition of 168 million barrels to state inventories--is
likely to begin in the first half of 2011.
That stocking up, coupled with growing commercial inventories owned by Chinese
oil companies, could boost the price of crude oil by as much as $6.50 a barrel
over 2011 and 2012, according to China International Capital Corp., a
Beijing-based investment bank.
The renewed focus on the strategic reserve will further cement China's role as
a driving force behind oil-market rallies. China's robust economic growth and
its ravenous appetite for petroleum were a major factor behind oil's rise to
above $90 a barrel this year as well as the record-setting run to nearly $150 a
barrel in 2008. Analysts widely expect crude prices to enter triple-digit
territory in 2011 if China's
rapid growth continues and economies in the developed world continue to
recover. February crude futures ended Wednesday down 37 cents at $91.12 a
barrel.
"We're going to be watching how many shipments are going into China," said Mark Waggoner, president of
Excel Futures, a broker based in Bend,
Ore.
China is looking
to bulk up its strategic reserves as a buffer against sudden disruptions of oil
supplies, a growing concern as the country imports more of its crude. The U.S.
established its reserves in 1975 after the Arab oil embargo. It now holds 726.5
million barrels of oil, enough to cover nearly 40 days of demand, according to
the Department of Energy. China
built its strategic reserve to 108 million barrels in 2009, enough to cover
about 12 days of demand.
The size of its strategic reserve will total about 272 million barrels after
the second phase is complete, according to several analysts' estimates. A third
phase later this decade should add another 228 million barrels, China
International Capital Corp. analysts said.
"It's very important for social stability and economic growth," said
Joseph Stanislaw, an energy consultant. "Right now there's plenty of
supply. This is the time to do it."
Given the secrecy surrounding the government's oil purchases, China's reserve
building is something of a wild card in the oil market. However, a daily
addition of 150,000 barrels--enough to fulfill one-third of the second phase in
2011--would still amount to nearly 10% of the International Energy Agency's
forecast increase in global demand next year.
A few factors could mitigate the effect of large builds in China's
stockpiles. If oil supplies begin to look tight, members of the Organization of
Petroleum Exporting Countries can increase production. However, Saudi Arabia,
which has the lion's share of spare capacity, indicated at an OPEC
meeting earlier in December that the organization isn't concerned about global
supplies.
China
itself could back off from filling its reserve if prices keep rising. The
country finished the first phase of its stockpiling after prices had collapsed
from nearly $150 a barrel in late 2008 and early 2009. If crude gets too
expensive in 2011, China
could play the waiting game again, said Kang Wu, a senior fellow at the East-WestCenter
in Honolulu,
who tracks Chinese energy issues.
"They were pretty proud that they didn't buy when the price was above
$70," Wu said. "It doesn't mean it's the policy. They buy as they see
practical."