How does China want to bring oil prices down “by force”? – Money Times

Petroleum
China, the world’s largest oil importer, has accumulated reserves of 220 million barrels of the commodity in the last decade (Image: REUTERS/Dado Ruvic)

The unprecedented intervention of China in the world market of Petroleum, with the sale of strategic reserves for the first time, has the explicit objective of lowering prices.

The announcement comes amid rising energy costs in China, not just for oil but also for coal and natural gas, and electricity cuts in some provinces, which forced some factories to reduce production. Inflation is also accelerating rapidly, a political hurdle for the Beijing government.

In a statement on Thursday, the National Administration of Food and Strategic Reserves said the country had tapped into its gigantic oil reserves to “relieve pressure from rising raw material prices.”

The government did not give further details, but people with knowledge of the matter said the statement referred to millions of barrels the government offered in mid-July.

The Chinese reserves agency also said that a “normalized” rotation of oil in state reserves is “an important way for reserves to fulfill their role in balancing the market”, indicating it can continue to release barrels.

The agency said that putting oil from national reserves on the market through open auctions “will better stabilize supply and demand in the domestic market.”

There was no response to calls to the press offices of the State Council of China and the National Development and Reform Commission with a request for comment outside normal business hours.

China, the world’s largest oil importer, has accumulated reserves of 220 million barrels of the commodity in the last decade, according to Energy Aspects.

This cushion differs from strategic oil reserves in the US and Europe, known as the SPR, which are accessed only during supply cuts and wars.

China, however, signals that it is willing to use reserves to try to influence the market.

“At first glance, it’s a pretty clear statement of intent to use SPR to drive down oil prices for domestic refiners,” said Bob McNally, a former senior policy adviser to the White House who now runs Rapidan Energy Group, a consultancy in Washington.

The release of reserves comes after inflation for Chinese producers accelerates to the highest level in 13 years old and just a month after the White House ask publicly to OPEC to pump more oil amid rising gasoline prices in the United States.

Together, the actions of Beijing and Washington suggest that the world’s two biggest energy consumers see the range of $70 to $75 a barrel as a red line for oil prices.

Hurricane Ida also wiped out part of US oil production, affecting supplies to China’s Unipec.

The Chinese government has achieved mixed results by using strategic reserves to limit rising commodity prices. Although the release of reserves often brings down prices, especially when confirmed, the retreat tends to be short-lived.

“China’s move is undoubtedly aimed at alleviating rising price pressures on rising oil import costs,” said Ryan Fitzmaurice, commodity strategist at Rabobank.

“It is unlikely that the desired effect will appear, in our view. For a start, it signals vulnerability to the oil financial market and, furthermore, there is not enough physical supply to make an impact.”

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