China is expected to resume building its strategic oil reserves next year, a development likely to quicken the march to triple-digit oil prices.
It isn't a secret that China is building an emergency stockpile of oil akin to the U.S. Strategic Petroleum Reserve, though the Chinese government is secretive about the timing for filling its storage tanks. A chorus of oil analysts say the second phase of China's reserve building -- an addition of 168 million barrels -- is likely to begin sometime in the first half of 2011.
That stocking up, coupled with rising commercial inventories owned by Chinese oil companies, could boost the price of crude oil by as much as $6.50 a barrel in 2011 and 2012, says China International Capital Corp., a Beijing investment bank.
The increasing strategic reserve further cements China's role in driving oil-market rallies. China's robust economic expansion and ravenous appetite for petroleum were a big factor behind oil's rise to above $90 a barrel this year and the record-setting run to nearly $150 a barrel in 2008. Analysts widely expect crude prices to enter triple-digit territory in 2011.
Wednesday, the price of the light, sweet crude-oil futures contract for February delivery fell 37 cents, or 0.4%, at $91.12 a barrel on the New York Mercantile Exchange. Prices are up 8.3% in December and up nearly 15% for the year.
'We're going to be watching how many shipments are going into China,' said Mark Waggoner, president of Excel Futures, a broker in Bend, Ore.
China is looking to bulk up its strategic reserves as a buffer against sudden disruptions of oil supplies, an increasing concern as the country imports more crude.
The U.S. established its reserves in 1975 after the Arab oil embargo. It now holds 726.5 million barrels of oil, enough to cover nearly 40 days of average demand, according to the Department of Energy. China finished building its strategic reserve to 103 million barrels in 2009, enough to cover about 12 days of demand. The reserve is expected to reach 500 million barrels this decade.
Given the secrecy surrounding the government's oil purchases, China's reserve building is something of a wild card in the oil market. Still, a daily addition of 150,000 barrels -- enough to fulfill one-third of the expected second phase in 2011 -- would amount to nearly 10% of the International Energy Agency's forecast increase in global demand next year.
If oil supplies begin to look tight, members of the Organization of Petroleum Exporting Countries can increase production. However, Saudi Arabia, which has the lion's share of spare capacity in the cartel, indicated at an OPEC meeting this month that the group isn't concerned about global supplies.
China itself could back off from filling its reserve if prices keep rising. The country finished the first phase of its stockpiling after prices had collapsed from nearly $150 a barrel in late 2008 and early 2009. If crude gets too expensive in 2011, China could play the waiting game again, said Kang Wu, who tracks China energy issues at the East-West Center, a Honolulu think tank.
'They were pretty proud that they didn't buy when the price was above $70,' Mr. Wu said. 'It doesn't mean it's the policy. They buy as they see practical.'
