COVID-19: Pains, gains as China, USA, others stockpile cheap oil

Until the end of 2019, China was still a very strong economy with very active sectors, including manufacturing, transportation, commerce, telecommunications as well as oil and gas. The strength of its economy was even expected to drive developments in other economies around the world.

For instance, in its World Oil Outlook obtained by The Daily, www.thedaily-ng.com, the Organisation of Petroleum Exporting Countries, OPEC, OPEC, had stated: “Long-term global oil demand is expected to increase by about 12 million barrels per, mb/d, rising from 98.7 mb/d in 2018 to 110.6 mb/d in 2040. From a regional perspective, there is a contrast between declining Organisation for Economic Co-operation and Development, OECD, demand and expanding demand in the non-OECD. Driven by an expanding middle class, high population growth rates and stronger economic growth potential, non-OECD oil demand is expected to increase by 21.4 mb/d between 2018 and 2040.”

However, that was not to be for a reason. The emergence of Coronavirus pandemic towards the end of 2019 put paid to it. Consequently, in its recent report, OPEC, which backpedalled on its previous prediction, stated: “World oil demand growth in 2020 is adjusted lower by 0.92 mb/d to 0.06 mb/d, reflecting slower global economic growth associated with a wider spread of Covid-19 beyond China. The impact of the Covid-19 outbreak in China and its adverse impacts on transportation and industrial fuels were the main causes of this downward revision.”

Expectedly, the situation has caused oil prices to drop very significantly from over $60 to an average of less than $20 per barrel in the past few weeks. Investigation by thedaily-ng.com showed that the poor situation might not record significant improvement soon. This means that oil exporting nations, especially Algeria, Angola, Congo, Equatorial Guinea, Gabon, Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirate and Venezuela, which are members of OPEC, would not be able to generate adequate funds for the funding of their development projects this year.

However, while these OPEC members and others continue to suffer from Coronavirus pandemic and dwindling revenue, China, the origin of the disease, United States of America and some other oil consuming countries, have resorted to stockpiling the cheap product for various reasons.

According to Oilprice.com, “China doubled the fill rate at its strategic and commercial inventories in Q1 2020, taking advantage of the low oil prices and somewhat supporting the oil market amid crashing demand by diverting more imports to storage, rather than outright slashing crude imports.

“According to estimates from Reuters columnist Clyde Russell based on official Chinese data, between January and March, nearly 2 million bpd of oil imports were not processed by refiners. To compare, the estimates for Q1 2019 show that out of the total Chinese crude oil availability—including imports and domestic oil production – just 1.07 million bpd were held back and not processed by refiners. The difference between the Q1 2020 and the Q1 2019 unprocessed crude suggests that this year China has doubled the rate at which it has been filling its strategic and commercial inventories, Russell argues.

“China doesn’t report inventories, so the rate at which it fills stockpiles is almost always a game of guestimates. This year so far, despite the COVID-19 pandemic that resulted in a Chinese demand slump first, China has not dramatically cut its imports, according to official customs data. Oil imports have been lower than recent record-breaking levels, but not as dramatically as they would have been if China had not diverted a higher volume of oil imports into storage.

“Emerging from the coronavirus lockdown, China’s oil refiners are buying ultra-cheap spot cargoes from Alaska, Canada, and Brazil, taking advantage of the deep discounts at which many crude grades are being offered to China with non-existent demand elsewhere.

“In March, China’s crude oil imports rose by 4.5 percent on the year, but dropped compared to January-February. However, independent refiners began ramping up bookings for crude arrivals in March and April as early as at the end of February.”

Nevertheless, no one knows and can say precisely the total volumes still required to be stockpiled by China and other net oil importers. However, one thing is certain; the stockpiling, though perceived to be ‘evil’ in some quarters, could culminate in reducing or eliminating excess oil from the market. In other words, it would enhance the efforts of OPEC and others toward achieving market stability. Time will tell.

For a better society