Business World

Beijing appears to be taking advantage of falling crude oil prices to fill its strategic reserve tanks, potentially giving it a 100-million-barrel buffer by year’s end that could help smooth out future demand growth.

A near 30 percent surge in China’s crude oil imports to their third highest daily rate on record last month, coupled with widespread signs of anemic demand in the world’s second-largest user, has stirred fresh speculation about Beijing’s emergency reserves, the status of which remain a closely guarded secret.

Data due on Thursday is expected to show that the country’s major refiners — which have increased output by only 5.5 percent so far this year — could not have processed all of that crude themselves, suggesting some of it has been put in storage.

Analysts say it is still too early to conclude that Beijing must have given the order to top up its national reserves, half of which were constructed over the past two years while the other half are due to be finished by the end of the year.

But from the economics point of view, oil’s plunge from a record above $147 hit in July to below $60 definitely makes buying crude now an attractive and logical option, they say.

“There is no question about stockpiling,” said Lin Boqiang, director of the Center for China Energy Economics Research (CCEER) at Xiamen University.

“Strategic storing needs to be done even without a plunge in oil prices, and China should go for three months (of buffer stocks) now,” he said.

Building stocks now would also allow China to take advantage of the steep contango structure in oil markets, with prompt prices far cheaper than longer-dated futures, at a time when many oil companies and traders are struggling to profit from storage as the credit crisis drives up the cost of financing stockpiles payday advance services.

September crude imports rose 28.2 percent from a year ago, their fastest pace in more than a year, to hit 3.81 million barrels per day (bpd), the third highest ever. Domestic production has also eked out modest growth, helping meet some of the growing demand.

China’s first phase of its SPR plans, with tanks that can hold 100 million barrels of oil or just under a month’s imports, are due to be commissioned by year-end with the completion of the last two out of four bases at Qingdao and Dalian.

The first two facilities at Zhenhai and Zhoushan were up and running more than a year ago.

Last year the government leased out its 33 million barrel capacity tanks at Zhenhai to top refiner Sinopec Corp (0386.HK: Quote, Profile, Research, Stock Buzz) for use as commercial storage, but it is not clear whether that arrangement continues or whether the tanks are full or not.

Beijing has maintained a near total silence on the status of these tanks and the location for a second batch of facilities to hold some 26.8 million cubic meters, plans for which have just been finalized, Beijing announced on Wednesday.

By comparison, the U.S. Strategic Petroleum Reserve (SPR) holds about 700 million barrels.

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