US, China decision to sell oil from reserves to have little impact on prices

-China says it will auction 7.4 million barrels on Sept. 24 while US is set to sell crude from emergency stocks from Oct. 1 to Dec. 15

The US and China’s upcoming release of crude from their Strategic Petroleum Reserves (SPR) is not expected to affect global oil prices, nor is it significant enough to make OPEC+ alter its supply policies, according to experts who spoke to Anadolu agency.

China’s National Food and Strategic Reserves Administration (NFSRA)—which manages the country’s strategic material reserves—announced earlier in September that it would release 7.38 million barrels from its SPR to ease the pressure of high feedstock costs on domestic refiners.

The barrels will be auctioned off in phases to a limited number of state-owned oil companies and integrated independent refineries, the first of which will take place on Sept. 24.

The barrels for auction include Qatar Marine, Forties, Oman, Murban and Upper Zakum in five lots, and were put into storage at Dalian in northeastern China last year.

Similarly, the US government has agreed to sell crude oil from the nation's emergency reserve to eight companies including Exxon, Chevron, and Valero, under a scheduled auction to raise money for the US budget.

The Department of Energy announced on Monday that a total of 20 million barrels of oil would be supplied from SPR facilities in Texas and Louisiana between Oct. 1 and Dec.15.

The decisions of China and the US to release crude oil reserves to the market via public auction confirms that they will not quietly endorse oil prices in excess of $70-$75 barrels per day (bpd), Julien Mathonniere, an oil markets economist at Energy Intelligence Group, told Anadolu Agency, predicting that these policies would not unduly affect oil prices.

He, however, recalled that China’s official confirmation last week had initially knocked $1 off Brent and West Texas Intermediate.

Mathonniere stressed the decision was not actually “new” and said the crude from China’s SPR was already on the market.

“Beijing’s plan was mulled in March when Brent moved above $70 per barrel, and it was known since last July. Even if China owns about 1 billion barrels of oil in storage, this is no match to the massive volumes that producers can bring to or withhold from the market,” he said.

He noted that the market “quickly called China’s bluff, highlighting that the country’s economy is still growing and will hence continue to consume more oil.”

“If China’s demand goes up, then those reserves will have to go up too and be replenished. Traders already report more buying from Chinese refiners in the spot market,” he explained.

Vandana Hari, the founder and CEO of Singapore-based Vanda Insights, also agreed that news of China planning or releasing crude from state reserves failed to sway prices, saying “the volume in the maiden round is quite small -- it is less than three-quarters of a good day’s crude imports by China.”

Hari said that news about China’s decision came at a time when market attention was fixated on supply shortages and US stock draws. However, she believes that the significance of China’s new strategy can hardly be overstated.

“It is not known what price levels or domestic inflation rates may trigger future releases, but this is a new bearish surprise that Beijing can spring on the market at short notice,” she warned.

-SPR sales not to change OPEC+ supply policy

Chinese reserves are also supposed to be commercially viable if only to cover the cost of holding them, Mathonniere said, in explanation for the rationale in releasing oil from the SPR.

“China can sell crude bought during the trough of the pandemic at half the current price and book a substantial profit.

“The US is also selling oil from its SPR, but the country can afford it. It is nearly self-sufficient in oil thanks to higher shale production and therefore, it doesn’t need that much of a strategic crude buffer,” he explained.

Hari said: “in short with the hundreds of millions of barrels of state and commercial reserves at its disposal, Beijing has a powerful tool to cool down overheated crude prices, at least over a short period, and it intends to use it.”

The Organization of Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, is unlikely to deviate from its planned gradual tapering strategy, involving a 400,000 bpd increment in supply each month unless there is a sizeable and sustained shift in the global demand recovery.

The latest data from China's National Bureau of Statistics shows there are nine storage bases in the country with a total crude oil reserve capacity of 238 million barrels. This stored amount is estimated to be equivalent to China's 80-day oil demand.

The US has the world's largest strategic reserves of approximately 714 million barrels stored in huge underground salt caverns at four sites along the coastline of the Gulf of Mexico.

According to data released by the US Energy Information Administration on Wednesday, the country’s level of crude oil reserves was nearly 619.6 million barrels last week.

By Ebru Sengul Cevrioglu and Sibel Morrow

Anadolu Agency

energy@aa.com.tr