China’s aggressive stockpiling of oil will have serious political and economic ramifications in the U.S., effects that could influence election outcomes and gas-pump prices in both the near term and long term, according to industry expert Chris Faulkner, CEO of Dallas-based Breitling Oil and Gas.
According to the International Energy Agency (IEA) China 2012 Update, China has completed four stockpiling facilities and has begun construction of eight more, for a combined capacity of more than 300 million barrels as part of its Strategic Petroleum Reserve (SPR) plan. A planned third phase is expected to boost total SPR capacity to approximately 500 million barrels by 2020. Added demand, according the IEA, could amount to 50 million barrels this year alone.
In light of this, how will oil prices be affected – for the short term, this year and more importantly for the long term – as China forges ahead with stockpiling?
“This could not come at a better time if you are looking at it from a higher-demand perspective,” says Faulkner. “Purchases by China is a much needed bright spot in an otherwise grim outlook for near-term oil demand amid uncertainty about the future GDP of the Chinese economy and the EU debt crisis, which has pushed oil prices in the recent months.”
“Their buying spree is unprecedented,” says Faulkner, and because of it “oil is heading to $120 a barrel and gas at the pumps to $4. It could mean President Obama’s swan song.”
This week, Oil and Gas Investor caught up with Faulkner and asked him about China’s burgeoning oil and gas reserves:
OGI: How will China’s stockpiling affect the U.S. presidential election?
CF: The biggest issue affecting the American people, and in turn the president, in an election year are high gasoline prices.
The fact that we are coming into mid-September with oil hovering at $100 a barrel is going to put the national average for a gallon of gas near $4. That is a serious problem for President Obama. If you look at supply and demand models and factor in the EU debt crisis oil prices should be coming down, and that would also mean gasoline should follow. The reason they are not? I believe it’s because China, the world’s second-largest consumer of oil, has been building up its oil reserves at a rate not seen since 2008 and thus creating “phantom demand” in the marketplace.
China has been in the process of mimicking the United States’ Strategic Petroleum Reserve to shield it from large price swings and to protect its energy needs during a crisis.
They have already stockpiled 90 million barrels during the first two quarters of 2012. This is in addition to the oil imports they need to meet their domestic energy demands.
China is also finishing up constructing the second phase of SPR facilities that will store an additional 200 million barrels of new oil and enable them to have stockpiles equivalent to 100 days of net imports by 2020. They will continue their buying spree in the near term.
It’s my understanding that China is planning a third-phase facility that will take the overall storage numbers to just over 600 million barrels of oil. If this were to take place it would allow China to become the second-largest accumulator of crude oil in the world, behind the U.S.
All of this leads to additional demand by what will soon become the biggest user of oil on the planet.
OGI: Why did China develop this plan? What it will do for its economy?
CF: I think China is looking to do two things: First, protect the country against price swings in worldwide crude prices.
Second, China knows its demand will continue to rise in the long term, and when the world economies begin to rebound so will oil prices.
As we look at a time when oil prices remain near $100 a barrel and factor in that demand is down, the EU debt crisis is pounding on all of the European counties and that China’s own demand and GDP are down in the near-term, this doesn’t bode well for cheap oil prices in the future. China is on a buying spree when prices are cheap and when they have room to store oil for the proverbial rainy day. Lastly, China has had no oil storage and thus no shield during an energy crisis. Beijing bureaucrats know that energy is the lifeblood to their GDP and economy.
If anything where to happen to disrupt incoming oil to China, even in a very near-term scenario, they would have serious troubles. So, this is another safety net the Chinese are building for themselves.
OGI: How long will the buying sprees last?
CF: I would expect China to continue buying oil to store well beyond 2013 to meet the 600 million barrel capacity they have in the works.
One thing of interest here is that the U.S. has really enabled China to continue its buying spree and at a hefty discount. Remember that China is not part of the Iranian oil embargo. The crude that China buys from Iran, which is becoming ever more isolated as a result of a U.S.-led sanction program, is coming with major price concessions as Iran has very few choices when it comes to countries willing to buy its oil.
China is forcing Iran to take Chinese yuan for the oil it purchases. Since China does not allow the currency to freely trade on international markets they are in fact just trading dollars with themselves, boosting their economy and garnering the oil they need for cheap. It’s a win-win situation for China.
Lastly, consider that Beijing has leaned on its three state oil companies to enter into long-term arrangements to purchase oil from other countries, and this will restrict the country from reducing its purchases even if there were a declining domestic demand. All of this points to a long-term buying spree.
OGI: Where are you on oil prices?
CF: I am bullish on oil prices right now in the near term.
I think China will continue on its buying spree, and I feel the American economy is at the turning point of spinning out some positive signs of economic recovery. I think we are looking at plus-$100 oil going into 2013. I would also consider India in the picture when analyzing future oil demand. Currently, India is forecast to be a major demand driver behind world oil consumption. However, they lack any real strategic petroleum reserves. The country has announced they are targeting reserves of about 50 million barrels – equal to little more than two weeks of supplies – by the end of this year.
However, so far they have failed to amass even 10 million barrels.
I feel certainly as India begins to plan for the future that they, too, will begin building SPRs of significant quantity. Let’s not forget the real probability of quantitative easing taking place and what they will do to oil and gas prices – forcing them immediately higher.
By Brian O’Connell, Special To Hart Energy