The persistence of front month and near month crude oil prices above $60 has many commentators puzzled.
Demand remains low and inventories, despite a recent ease, remain high – especially when tankers are considered. Opec’s compliance level has also eased off in April. Investment in future production capacity is certainly falling, but this is a problem for the medium term. For many observers the price resilience is difficult to explain without pointing to macro factors such as equity markets, the weaker dollar and risk appetite.
Neil McMahon at Bernstein has another theory: that China building its Strategic Petroleum Reserve may be affecting price levels.
China’s imports appear to have spiked in March and April, they write, and storage levels have reached a new peak:
We believe this reflects not strengthening demand, but rather China’s
efforts to boost its Strategic Petroleum Reserve after recently completing construction of Phase 1. To verify this we have utilized satellite tracking of tanker movements, as well as time-lapse satellite images
to observe the amount of storage expansion. Our analysis confirms that tanker capacity arrivals into China have spiked up in recent months, in line with imports, but more importantly, tanker arrivals into
SPR ports have increased materially (around 400 Kbbl/d according to our estimates).
And some interesting tracking data:
• And satellite images confirm a significant increase in storage construction in the last few years. This suggests that China is stock-piling crude oil, in line with its stated objective to increase its days of forward cover, which currently stands at only 28 days of imports and 14 days of total consumption (if the
SPR is full). This is well below the target level of 90-100 days. Overall, this recent drive by the Chinese to fill their SPR should have offered some support to crude prices, and will continue to do so going forward during implementation of the next two phases of the project.
China also plans to build strategic reserves of petrol and diesel, the FT reported last week, mirroring similar strategy in Europe.
However McMahon says for prices to continue to rise throughout the northern hemisphere summer, more signs of tightening fundamentals will be needed. This could come in the form of shut-ins in mature non-Opec regions.