China's crude oil reserves are in trouble

On Thursday, the June crude oil futures on the New York Mercantile Exchange closed up by 0.23 US dollars, reaching 118.30 US dollars per barrel, marking a 0.19% increase. Meanwhile, the ICE-6 Brent crude oil futures fell by 0.38 US dollars to 115.57 US dollars per barrel, but still maintained a 0.33% gain, inching closer to the $120-per-barrel threshold. As global oil prices continue to climb, domestic refining giants are facing increased risks of market inversion, while China’s long-planned crude oil reserves have become more critical and operationally viable. Experts warn that if China buys oil now, it could drive international prices higher, but if it delays, prices may surge beyond the target range for strategic reserves. The $130-per-barrel mark is expected to be reached soon, with many industry observers predicting that the $120 level will soon be breached. Fan Xiaoping, Secretary General of the Storage and Transportation Sales Committee of the Guangdong Provincial Petroleum Association, highlights that ongoing geopolitical uncertainties and the upcoming summer season are likely to push oil prices even higher. A breakthrough above $130 per barrel is imminent, he says, and if prices drop, it might not happen until the second half of the year or early next year. Since the start of this year, international oil prices have surged past the $100 mark and eventually crossed $110. At the end of last year, several investment banks had forecasted that oil prices would remain within the $80 to $100 range. However, as prices have deviated from that range, China's strategic crude oil reserves have also struggled to maintain affordability. Currently, the country's strategic reserves aim to reach about 30 days' worth of supply by 2010. The first phase of the China Strategic Petroleum Reserve Plan includes four onshore storage bases in Zhejiang, Shandong, and Liaoning, with a total capacity of 16 million cubic meters. Although some crude has been injected, the reserves are still far from their target levels. The management and operation of these reserves remain a complex issue. There are differing opinions within the industry on whether China should accelerate its purchases for strategic reserves. Yao Daming, director of the Oil and Gas Division at the Guangdong Oil & Gas Merchants Association, argues that buying oil for reserves is a smart move amid rising global prices and a weak U.S. dollar. He points out that China's growing oil imports have not translated into greater influence over pricing, as the country has not fully engaged in the high-risk international oil futures market. He suggests that China should integrate more deeply into this market, learning from domestic futures companies and improving risk management to eventually gain more say in the global oil trade and ensure stable supply. However, Fan Xiaoping disagrees, stating that with China's oil import dependency now at 56%, purchasing more oil now could further inflate prices and raise the cost of strategic reserves. He suggests that before making large-scale purchases, China should focus on reducing demand growth—by exploring alternatives, coordinating transportation and energy development, and signaling lower dependence to the international market. He believes that waiting for a price drop to the $70–$80 range could be an ideal time to purchase.

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