China To Build Strategic Oil Reserves (SNP)

In late 2005, China began to fill its strategic petroleum reserve of 102 million barrels. It has added to the reserve on and off ever since, sometimes buying the oil on the open market and other times stashing away a portion of the country’s take from investments in international projects. China’s eventual goal is 400 million barrels.

According to Bloomberg, an official with China’s National Development and Reform Commission has stated in an article for the People’s Daily, that "[t]he current financial crisis, global recession and sluggish energy market offer a favorable opportunity for China to expand cooperation with energy-producing nations and neighboring countries."

That means expanding opportunities in Myanmar (Burma) and Sudan, both countries that have difficulty attracting investment because of their repressive human rights policies. Myanmar, in particular, stands to benefit from its large and largely undeveloped deposits of natural gas. China is helping build a gas pipeline to import gas from Myanmar.

China Petrochemical Corporation (Sinopec; NYSE:SNP) has built new storage tanks for about 24 million barrels of oil and is ready to begin filling them. Domestic consumption of oil in China has fallen, and the government has even lowered fuel prices.

It’s unlikely that China’s intentions will, by themselves, move oil prices much one way or the other. Even 100 million barrels is barely more than one day’s international demand. A short paper by the St. Louis Federal Reserve Bank suggests that filling China’s strategic reserve will, at most, increase demand by 0.125 percent.

Paul Ausick