Global oil supply imbalance shrinks China’s crude reserves

SINGAPORE (Bloomberg) --China’s crude stockpiles fell to the lowest level in almost a year amid a global drawdown in inventories that’s being driven by a tighter supply-demand balance and higher costs to hoard oil.

Inventories capped a seventh weekly decline last week, dropping to 990 million barrels, according to market intelligence firm Kayrros. While that’s the least since February 2020, stockpiles are still 16% higher than a year earlier. A resurgent virus and lockdowns in parts of the country have raised concerns about a near-term demand hit, but an overall improvement in domestic travel compared with last year is contributing to the recovery.

Timespreads for global benchmark Brent are in a bullish structure known as backwardation -- where prompt crude is pricier than later shipments, making it unattractive to hoard cargoes and profit from delayed sales. Meanwhile, OPEC+ signaled on Tuesday that it expects to drain an oil surplus by the middle of the year, and Goldman Sachs Group Inc. sees worldwide demand reaching pre-virus levels of 100 million barrels a day by August.

Stockpiling in China has leveled off, with higher oil prices and limits on storage capacity the main factors driving the decline, Kieran Clancy, assistant commodities economist at Capital Economics Ltd., said in a note. Crude purchases for stockpiling in 2021 are likely to be far lower given tighter storage, while prices are unlikely to revisit the lows of last year, he said.

Brent’s prompt timespread was 27 cents a barrel in backwardation, compared with a 7-cent contango at the start of the year.

In September, stockpiles hit a peak of about 1 billion barrels, said Kayrros, which analyzes satellite data. China has expanded its storage capacity recently, in part to accommodate higher processing and to meet its ambitions for energy independence, Kayrros said in a note posted on its website. The nation’s rebound from the Covid-19 pandemic last year allowed refiners to take advantage of lower prices and pick up cheap cargoes, the company said.

China reduced its crude inventories by a record in December as the nation imported less and as it processed its biggest ever volume of oil, Bloomberg calculations based on government data showed.

Before the coronavirus swept through the region and wiped out consumption, stockpiles at China’s 190 terminals tracked by Kayrros were at 856 million barrels in February of last year, according to the company. Inventories held around 850 million barrels throughout 2019, the company said.