China takes advantage of falling prices to build strategic reserves

Beijing: 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 per cent surge in China's crude oil imports to their third highest daily rate on record last month, coupled with widespread signs of anaemic 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 later yesterday was expected to show that the country's major refiners - which have increased output by only 5.5 per cent so far this year - could not have processed all 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 Centre for China Energy Economics Research 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.

October crude imports rose 28.2 per cent 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.