VelocityShares Credit Suisse 3X Long Crude ETN (UWTIF)

[Smittle]

Why China is the oil ‘wild card’ that could overrule any OPEC moves

By Sara Sjolin

Published: Sept 27, 2016 11:57 a.m. ET

China’s secret stockpiles could cap any oil rally, analyst says
Reuters

Qingdao - one of China’s big oil-importing ports

All eyes are on the informal OPEC meeting in Algiers this week, but any efforts by the cartel to boost oil prices could easily be quashed by an unexpected player in the energy market: China.

Taking advantage of the slump in oil prices CLX6, -3.51% LCOZ6, -3.51% , the country has in recent years aggressively accelerated its buildup of strategic petroleum reserves, giving it a strong tool to cap a rally in oil prices, energy experts said.

“Regardless of what happens on the supply side, there’s this wild card factor of the strategic petroleum reserves,” said Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices, at an event in London on Tuesday.

“If OPEC does freeze production and tries to bring the price back up, China may choose not to buy oil at the higher price and just use its reserves,” she added. “Or even more dramatically, they could start exporting themselves, like they did with other commodities.”

Read: OPEC to discuss cutting oil output by 1 million barrels a day

In the first scenario, global demand for oil would fall, which could halt a potential OPEC-fueled price recovery. And in the second scenario, supply would rise and offset any cut or freeze agreed by other producers.

In any case, the stockpiles essentially mean China has created an emergency brake to pull if prices rise too fast to their liking. And that’s creating a big risk to energy markets, Gunzberg said.

“It’s this unknown that could keep the oil prices down for much longer than we might currently expect,” she said. “It’s much, much harder to make a case to the upside than the downside in the oil market right now.”

“We’ve seen China do this with other commodities. We’ve seen it in cotton, we’ve seen it with nickel, we’ve seen it with other industrial metals. Anything that’s easy to store, China seems to buy up, whenever it’s cheap,” she added.

Read: Rogoff warns ‘hard landing’ in China poses biggest threat to global economy

The secret stockpiles
China is very secretive about the size of its strategic reserves or for how long it would be able to meet domestic demand without any imports. The country finished building the first phase of its buildup program in 2009, with four sites that hold the capacity of 91 million barrels in total, according to reports. A second phase will be finished in 2020, with a reported capacity of around 245 million barrels.

“It never suits any buyer, or bulk buyer, to flag to the market how much they want to buy so we’re likely to get a lot of misinformation around that for quite some time to come. SPRs are strategic, as the name suggests, so the government isn’t going to talk about it,” said Dave Ernsberger, global head of oil content at S&P Global Platts.

“India is also building a fairly large SPR. They just began filling it this year, so that’ll be a factor in the market as well. Those countries that are looking to ultimately build reserves, they cover about 30-50 days of demand,” he added.

China’s oil imports jumped to about 7.77 million barrels a day, the fastest pace since April, but it’s unclear how much was for consumption or how much ended up in stockpiles.

Goldman Sachs on Tuesday also provided a downbeat outlook on the oil, dramatically cutting its fourth-quarter forecast for West Texas Intermediate crude oil. The Wall Street bank now sees crude falling to $43 a barrel, down from $50 expected previously, regardless of the outcome of the Algiers meeting.

“While a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end,” the analysts said.

Crude oil was down 3.6% at $44.28 a barrel on Tuesday, while Brent slumped 3.6% to $46.23.

http://www.marketwatch.com/story/why-china-is-the-wild-card-that-could-overrule-any-opec-moves-2016-09-27?mod=MW_video_top_stories