Asian Governments Stockpile Crude To Fend Off Supply Woes

Economic powerhouses China and India may be enduring a period of slower growth, but Asian crude oil storage demand is strong as a result of government-initiated stockpiling, a Wood Mackenzie analyst noted in a recent blog entry.

Contrary to expectations in this contango environment in which anticipated higher future prices encourage a buildup of commercial petroleum reserves, this demand is mainly derived from strategic petroleum reserves (SPRs) to defend against potentially severe disruptions to crude oil supplies.

“Asia imports more than 70% of its crude oil requirement, with many of its suppliers having a high geopolitical risk,” wrote Benjamin Tang, Singapore-based analyst who covers oil demand for Asia Pacific. “A major supply disruption could severely impact economic activities and growth, which is why many Asian governments are developing strategic reserves. China and India are already making rapid strides in building SPRs, while the rest of southeast Asia is actively planning.”

Even if the U.S. crude oil export ban were to be lifted, Asian concerns about stability of supply would be unlikely to mean added opportunity for American producers.

“From an energy security angle, Asian governments will probably continue with their strategic storage building plans regardless of developments such as the lifting of the U.S. crude oil export ban,” Tang told Midstream Business. “Besides, refiners in Asia have a preference for heavier crude grades, as many of them have invested in secondary upgrading units and are able to process the lower quality [heavy crudes] for better economic yields. U.S. crudes tend to be lighter and are less suitable for Asian refiners.”

In total, the Asian countries in the Wood Mackenzie analysis, which include Australia, are expected to add about 280 million barrels (bbl) of storage capacity between 2015 and 2017. The company expects about 185 million bbl, or about 65%, to be dedicated to SPR facilities in China and India alone. For the region, that comes to an average of 240,000 bbl/d purchased for storage from 2015 to 2017, Tang wrote, or 40% above expected procurements for the period.

Short term, crude oil stockpiling in Asia could create a regional surge in purchases and influence market dynamics, but Tang thinks the strategy is geared more toward the long term.

“Following through on their SPR stockpiling plans will put Asian economies in a better position to withstand unexpected disruptions in the oil markets,” he said.

Tang views the Asian strategy as one that will support global crude oil prices in the short term as SPRs are built and filled.

“Conversely,” he told Hart Energy, “as outflows from SPRs will only be disbursed in an emergency, it is less likely to slow the price recovery of crude oil.”

Contact the author, Joseph Markman,at jmarkman@hartenergy.com.