Why Is China Stockpiling Oil?

One thing you cannot say about the Chinese government is that they don't have a very long-term vision. This is an interesting article on Reuters about how the country has fully loaded its oil reserves and now is looking to load up ships for even more. I wonder what we are doing... ah yes, that whole bank thing. One good thing about a near dictatorship is if you have the right people in charge at least you don't have to do this whole consensus building stuff.

I also wonder what this says for worldwide demand for petrol - if China has been busy buying for no reason other than storage, one could argue that demand is in fact weaker than it appears. But who really knows - there are so many moving parts I won't hazard a guess. What it does say is when people point to the huge surge in Chinese imports or the Baltic Dry Index popping, it doesn't necessarily mean a darn thing about a pickup in demand. It simply could be a government stockpiling resources at low prices.

• China has filled all four of its state-owned emergency oil reserve tanks to the brim and should now invest in oil tankers to add more to inventories while oil prices are low, a senior industry executive said on Monday in a rare acknowledgment of Beijing's secretive oil inventories.
• Coupled with data last week showing a one-third rise in commercial crude oil stockpiles last year, the admission suggests that a large share of of China's oil import growth last year was pumped directly into storage, and could be relied upon quickly to soften any demand recovery or if prices should rise.
• It also backs up speculation that the world's No. 2 energy user has been making good use of oil's $100 price fall to boost supplies while demand falters in an unfolding economic crisis.
• The first set of China's strategic oil reserves, which can hold about 100 million barrels, were built over the past two years, but data on their status is considered a state secret and information about their operations or tank levels is scarce. China plans to build a second-phase strategic reserve that will nearly triple the first batch to 280 million barrels by 2011, and industry executives have said the current storage capacity has already become a hurdle to bringing in more imports.
• China is taking the supply security issue more seriously than the market thought, says Yan Kefeng, Beijing-based senior oil analyst with Cambridge Energy Research Associates (CERA). "We expect China's oil stockpiling to reach a peak in 2009, and continue into the next year," Yan said, but did not give an estimate on the volume of stockbuild he expected.
• The remark is consistent with recent comments by government officials that China should better use its massive foreign exchange reserve to stock up key commodities from grain to metals to crude oil, and last week Beijing announced that it would boost its budget for stockpiling resources by $10 billion.
• China should act quicker to boost storage capacity as its import dependence is set to surge in the coming decade. "Floating storage bases are a good idea because China needs to do everything to boost reserves," Lin said.

Now if you are a bull on the Chinese economy this is the one line that should give you pause

• Together with record high stocks of gasoline and diesel accumulated ahead of last summer's Olympics, the stockbuild also meant Chinese oil demand may have slowed more than it appeared.

I cannot find the ABC News piece, but it was out about 6 months ago - it is striking how China is locking up natural resources throughout the world with "partnerships"; specifically this hour-long program was about how China is building out infrastructure (spend now) in Africa in return for access to those country's natural resources. Folks, this is our competition the next 50+ years... we, on the other hand, don't think out past one election cycle. If you have time, here is a lengthy piece called

The Age of the Dragon which is similar to what I saw on ABC

China is conquering Africa as it becomes the preferred trading partner of the continent's dictators. Beijing is buying up Africa's abundant natural resources and providing it with needed cash and cheaply produced consumer goods in return.

Comments

[youngolf:]

Our biz schools are a joke. Pumping out 'finance' majors who have no clue of what common sense means, just looking at a number on an excel chart. Taught by 'profs' who dont have sense to get in out of the rain, and can't hold a job in the real world, or got a Phd, went straight into
'teaching'. Sad.

Mar 10 10:18 AM

[longoil:]

Youngolf,

Most MBA curriculums are a collection of isolated courses (finance, accounting, organizational behavior, statistics, economics, etc). The problem is not the courses themselves, but the fact that the students are not taught the interrelations between them or the effect of external factors like geopolitics.

Finance methods are mostly trying to predict future stock valuations based on past valuation along with ridiculous variables like sales growth (how do you predict something like this ???)

Mar 10 10:59 AM

[User 371080:]

Would that partially explain why so many commenting on SA don't want to hear about politics? Possibly also partially explain the dismissive attitude of investing professionals toward government?


On Mar 10 10:59 AM longoil wrote:

> Youngolf,
>
> Most MBA curriculums are a collection of isolated courses (finance,
> accounting, organizational behavior, statistics, economics, etc).
> The problem is not the courses themselves, but the fact that the
> students are not taught the interrelations between them or the effect
> of external factors like geopolitics.
>
> Finance methods are mostly trying to predict future stock valuations
> based on past valuation along with ridiculous variables like sales
> growth (how do you predict something like this ???)

Mar 10 11:08 AM

[huangthomas:]

The loans China gave to Russia and Brazil are in exchange for the right to purchase certain quantities of oil at Market Price. The loans are not payment for oil.

We have strategic oil reserve for a long time. It has not scared anyone. Why be scared by Chinese oil reserve? Don't you think our mental stability may have been altered by our economy or stock market? Oil reserve tend to stabilize the price of oil. I know some traders playing with oil futures, options....don't like it. Well, keep screaming. It may improve your lung function!

Mar 10 11:15 AM

[Alex Filonov:]

Wake me up when they are finished. It will be time to short oil, again. And other commodities.

China acts on old communist ideology. There is no market reason for them to stockpile oil, buying futures would be much simpler and cheaper. There is no reason to buy other commodities in huge quantities. There are future markets for most of them where you can lock current price.

As for conclusion that economic situation is much worse than chinese government wants us to believe, it's so obvious. How can export oriented economy feel good when world demand falls of a cliff?

Mar 10 11:38 AM

[Mad Hedge F...:]

This is the smart trade. There is one canary in the coal mine that was squawking loud and clear yesterday. Chinese stockpiling, hedge fund short covering and rebel interruption of exports from Nigeria drove crude to a two month high yesterday at $48.50, up 50% from its December low. The huge contango, where far month futures contracts traded at enormous premiums, has shrunk dramatically, taking selling pressure off of the front month contract. Perish the thought, but could this be an early indicator of an economic recovery? Today’s stock market action certainly says so. Go buy that Smart car!

Mar 10 12:30 PM

[Tony Daltorio:]

Why is China stockpiling oil and other commodities? Because the Chinese think in term of decades. Meanwhile Americans think in terms of no longer than three months(corporations) or a day (individuals - what can I trade today to make a buck?). Gawd forbid anyone in this country investing for the long-term.......

Mar 10 12:52 PM

[User 373342:]

What's the point for the US to buy raw materials? Wake up, it's not like WWII, you don't have manufacturers any more.


On Mar 10 08:18 AM User 224899 wrote:

> China is doing what readers of Seeking Alpha wish they could do:
> using their cash to bottom feed while everything is cheap.
>
> Do you see the US government laying down stores of anything with
> intrinsic value? Are we establishing or building strategic reserves
> of anything at all? Jeesh! It's like our government is a 6 year old
> kid with ADHD and no memory at all.
>
> Here's a simple instruction for the US government to follow: while
> the dollar is up relative to other currencies, go buy stuff with
> intrinsic value that's priced in the other currencies while market
> prices across the board are low low low. That includes iron ore,
> copper, oil, coal (oh, we have lots of that here already), technical
> minerals (e.g., galenium, indium, osmium, lithium, selenium, etc),
> and cement.
>
> Here's another simple instruction for the US government: while constuction
> companies and factories are idle, and can be hired for a song, make
> contracts with them to make stuff we need like a bigger interstate
> highway system, a smarter and larger potable water distribution system,
> a decentralized system of military bases that can't be wiped out
> with a few successful attacks, a coast guard that's adequately equipped
> and allowed to design their own fleet of shallow water coastal vessels,
> a fleet of ice breakers and arctic-hulled oil exploration and recovery
> vessels, and a network of urban schools in America that don't all
> look like the Warsaw Ghetto in 1949.

Mar 10 01:11 PM

[PainfullyAware:]

On Mar 10 08:30 AM User 270430 wrote:

> So, is than argument for the efficiency of planned eonomies and the
> myth of "free markets"? Just a thought.



No this is not an argument for planned societies.

It is an example of the difference in Awareness of those with power.

China is attempting to bolster their "Necessities" to keep functioning and somewhat keep their people from rioting due to shortage.

America, by either monumental ignorance or sinister savvy to undermine and weaken, is doing little to prepare for the "forced" economic isolation that is coming and will be present for a time.

Instead the American Government seems content to ramp up production on Private Prisons - Jail For Profit.

What Lengths Do You Suppose That People Will Go To, To Remain In Power.

Most Tyrannical Governments Come Out Of Economic Hardship.

The Price Of Freedom Is Eternal Vigilance.

To Assume Benevolence Is Foolish.

Mar 10 02:00 PM

[pockyclips ...:]

Conversely, if oil prices have been falling (until very recently) while China has been tapping off the tank, what's going to happen if the world economy doesn't show drastic improvement by the summer?

Mar 10 02:38 PM

[@TexasER:]

Many westerners fear the Chinese because they are big and mysterious, and we have much trouble understanding of their culture. We have stereotypes that lead us to believe they are all number crunching geniuses. Kung-fu movies which are so popular endow them with super human abilities.

So when we hear about them stockpiling raw materials amidst falling global demand, some assume they are acting with some ancient wisdom we lack.

But building inventories just doesn’t sound like a super sharp move right now. So they are either stupid or desperate. My bet is desperate.

At least to me, speculating with the national treasure seems a bit desperate.

Mar 10 02:49 PM

[User 371080:]

Unless of course they see an urgent need to divest themselves of the $2 Trillion Dollars they hold.


On Mar 10 02:49 PM @TexasER wrote:


> But building inventories just doesn’t sound like a super sharp move
> right now. So they are either stupid or desperate. My bet is desperate.
>
>
> At least to me, speculating with the national treasure seems a bit
> desperate.

Mar 10 03:08 PM

[Brodie:]

Maybe there's some concern that if things get really tough and nasty that it might just be a little difficult to move commodities that are not readily available at home? As has already been mentioned who's going to tell the Russians that they have to do this or that. We've already seen pirate activity on the high seas but if the globe is in a real mess brought on by a massive system collapse who's going to be able to guarantee delivery of critical commodities such as oil at todays costs?

Mar 10 03:39 PM

[Arpan:]

1. The Chinese did not purchase 300MB/day barrels/day with the load. Just the right to purchase 300MB/day at market price. Its the same deal they reached with Brazil.

2. The Chinese still think in terms of the cold war. The stock pile is to protect its self from a disruption in supply. If there is a conflict with the US the US Navy could easily cut China off. As someone mentioned above its cheaper to protect yourself against price fluctuation with hedging.

Mar 10 04:38 PM

[Tony Petroski:]

I'm so tired of these "The wily Chinese know how to plan for the future while we have the attention span of 4-year-olds" articles. Yes, we know "near dictatorships" (as opposed to what? a full-blown "real" dictatorship?)can employ state planning more efficiently than free countries where people are pursuing happiness rather than fulfilling their part of the 5-year-plan. We'll see how that near dictatorship manages in the future when their ambitious and smart youngsters ask the question: "How long do we remain ants in an anthill?"

Mar 10 08:22 PM

[a. palmer jr.:]

The Chinese people don't have the constant bickering of government officials as the US does. They are mostly in one accord whereas the U.S are in a Democrat vs Republican thing. Their officials are trying to make China the world leader and the US officials are trying to find different ways to scam the working people.

Mar 10 09:12 PM

[Bad Banker:]

What the Chinese know:
1. Obama has little experience
2. He Does not understand the importance of oil to national security
3. Obama wants to be friends with the Taliban
4. The Taliban does not want to be friends with the US
5. The Taliban wants to disrupt the flow of oil to the US and their friends
6. When that happens the US will be SOL
7. The Chinese will rely on their reserves and contracts with Russia et. al.
8. The US, under Obama, is quickly becoming a third world country...think like a Cuba
9. In ten years, with run away inflation, the US will be making products, using minimum wage labor and shipping product to China.
10. The us is will be then known as the Obamanation.

Mar 10 10:58 PM

[Conan the B...:]

Peak Oil has not disappeared or dissipated, it still lurks in the background.

China will have first calls on Russian and Brazilian oil in the future.

The reserves function as emergency supplies.
Our oil reserves have the same function and have been tapped in years past when hurricanes have closed down the Gulf.

China looks past the present into the Future, Obama? who knows what he looks at, other than the Telepromter.

Mar 10 11:49 PM

[Rocknbob:]

It wont ...not with 700T$ in derivatives outstanding...


On Mar 10 02:38 PM pockyclips 2020 wrote:

> Conversely, if oil prices have been falling (until very recently)
> while China has been tapping off the tank, what's going to happen
> if the world economy doesn't show drastic improvement by the summer?

Mar 12 12:24 PM

[Even Walser:]

Excellent point, I could not have said it better myself.


On Mar 10 11:38 AM Alex Filonov wrote:

> Wake me up when they are finished. It will be time to short oil,
> again. And other commodities.
>
> China acts on old communist ideology. There is no market reason for
> them to stockpile oil, buying futures would be much simpler and cheaper.
> There is no reason to buy other commodities in huge quantities. There
> are future markets for most of them where you can lock current price.
>
>
> As for conclusion that economic situation is much worse than chinese
> government wants us to believe, it's so obvious. How can export oriented
> economy feel good when world demand falls of a cliff?

Mar 13 03:58 AM