IEA: China, India taking advantage of cheap oil to fill strategic reserves
The International Energy Agency (IEA) in its current monthly report said China and India are set to fill up their strategic petroleum reserves this year, taking advantage of lower oil prices. The two nations are building emergency stockpiles with millions of barrels of crude that mirror the reserves of oil and refined products that the US and its western allies amassed after the first oil crisis of 1973 to 1974.
China and India have said in the past they need to build strategic reserves to offset the risk of a disruption in supplies, mostly from the Middle East and North Africa. Western countries have used their strategic reserves only three times over the past 35 years, during the first Gulf War in Iraq in 1991, after hurricane Katrina in 2005 and in 2011, after the start of the war in Libya.
India has yet to start storing crude oil, but the IEA said the government has approved a $338 million budget to cover the filling of its first emergency tanks this year. At current prices, that would amount to 6.5 MMbbl to 7 MMbbl of crude. The Indian Strategic Petroleum Reserves Ltd., the company in charge of the stockpile, has already built a tank farm in eastern India capable of holding 10 MMbbl of crude. Another two facilities in western India are expected to be completed by the end of the year, adding a combined 28 MMbbl of capacity.
“Cheaper oil facilitates the building of strategic reserves,” the Paris-based IEA said in its monthly oil market report.
The purchases will add to global oil consumption growth, the IEA said, offsetting “current weak fundamentals” of supply and demand and potentially boosting prices. Brent crude, a global oil benchmark, has fallen 47 percent over the past year to trade at $57.03/bbl at present.
“Since oil prices began their rapid retreat last June, the import bills of oil-importing economies have declined,” the IEA said. “This has assisted governments in many of these countries in either adding to their strategic reserves or putting in place firm budgetary provisions to increase oil holdings.”
The energy watchdog said China was “expected to again stockpile crude in 2015” as it completes new tanking capacity. Beijing in November for the first time revealed details of its oil stockpiling program, saying it held about 91 MMbbl in four different locations. The US holds 696 MMbbl of oil in its emergency reserve, the largest in the world.
IEA also said that the recent rebound in oil prices is built on flimsy foundations, with few signs yet that cheap fuel is helping boost the global economy.
Oil prices plummeted by 60 percent between June and January, but have since come off six-year lows and stabilised somewhat, with London’s benchmark Brent trading around $60 per barrel and the WTI contract in the United States fluctuating around $50 per barrel.
It noted that a key driver in the recovery in oil prices, with Brent being up by 30 percent from the lows it touched in January has been drops in the number of rigs drilling for shale oil in the United States.
“Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations,” said the IEA
The IEA also warned “supply disruption risks are on the rise”, which could serve to push prices up sharply. It pointed to possible disruptions in social stability as countries dependent on high oil prices to fund social welfare programmes are forced to cut back, as well as unrest in Iraq and Libya provoking disruptions.
The IEA said global supply rose by an estimated 180,000 barrels per day in February to 94.0 million barrels per day (mbd) due to expanding production in countries outside the OPEC oil cartel.
Non-OPEC supply is still expected to grow this year, by 750,000 bd, but this is much lower than the 2.1 mbd gain in 2014.
Meanwhile, oil demand has also been picking up. The IEA raised its demand forecasts for every quarter this year, with the annual 2015 figure bumped up by 100,000 bd to 93.5 mbd.
Production in OPEC nations edged down by 90,000 bd to 30.22 mbd in February due to violence-related drops in Libya and Iraq offsetting gains in Saudi Arabia. OPEC members refusing to agree on production cut at the end of last year accelerated the plunge in oil prices.
FRANK UZUEGBUNAM