China's stock of oil reserves could prove to be the "wild card" for global oil prices and market dynamics, according to oil experts.
China has been taking advantage of the low oil price to stockpile crude for its government-controlled strategic petroleum reserve (SPR). This is, effectively, an emergency oil stockpile maintained by the country that gives it energy security and guards against the threat of oil shocks and an interrupted supply.
The People's Republic – the world's second largest oil consumer, according to the International Energy Agency (IEA) – has been a major importer of oil in recent years, along with India, taking advantage of low prices and largely supporting global oil demand growth at a time of rampant oversupply.
Much of China's cheap oil imports have been diverted into its strategic oil reserves which are believed to be close to capacity. This comes at a time when major oil producers, such as OPEC, are meeting in Algeria this week to discuss how to support prices to allow an imbalance in supply and demand to work its way out of the system.
Whatever OPEC decides, however, oil experts believe that China could take advantage of any rise in prices to start using its oil stockpiles as exports, potentially disrupting any major attempts to balance markets.
"Regardless of what happens on the supply side, there's this wildcard factor of the strategic petroleum reserves," Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices, said at a S&P Global briefing on oil markets in London on Tuesday.
"Now that China has bought so much cheap oil to fill their SPR, which nobody really knows how much there is (in it), if OPEC does freeze and tries to bring the price back up, China may push it back down because they might choose not to buy it at a higher price and just choose to use their SPR or start exporting it themselves - like they did with other commodities."
"So I feel that that is, right now, more of a factor influencing how long the low oil prices might stick around," Gunzberg said.
China first announced in 2009 that it was to build up the country's oil stockpiles in phases. In November 2014, it announced that the "first phase" of the government's emergency oil stockpile was storing 91 million barrels, Reuters reported.
In May 2016, the news agency reported that China was filling its second phase of SPR, which had a capacity of almost 245 million barrels, and believed the process would be completed before the end of the year.
A planned third phase of undisclosed capacity is due for completion by 2020 as China works toward the goal of reserves equal to 90 days of imports, Reuters noted.
China is notoriously secretive about its stockpiles, saying that revealing its reserves could put it at a commercial disadvantage when purchasing oil. At the same time, however, demand growth in China is slowing (although Chinese oil demand was still around 11.5 million barrels a day in June, the IEA said) and India has taken over as the leader in terms of oil demand growth.
Dave Ernsberger, global head of oil content at S&P Global Platts, told the briefing that China's SPR is a challenge for markets. "The SPR in China is one of a number of unknown factors that mean you can never get too comfortable assuming any set of circumstances in the global oil markets."
He said the exact size of China's SPR was unknown, however, making it a risk that was hard to quantify.
"It never suits any buyer, or bulk buyer, to flag to the market how much they want to buy so we're likely to get a lot of misinformation around that for quite some time to come. SPRs are strategic, as the name suggests, so the government isn't going to talk about it."
However, while China might have millions of barrels of oil stockpiled for either its own emergency use or to sell, demand growth from the country is ebbing. The International Energy Agency (IEA) warned this month that "recent pillars of demand growth China and India are wobbling."
S&P Global Platts' Ernsberger said that the slowdown in Chinese demand was worrying for major oil producers.
"The demand picture is very unsettling for OPEC and for all producers of crude and refined products (and this is seen most significantly in) the slowdown in growth in the Chinese market. China has returned more incremental demand for the oil market in the last five years than any other country in the world and more than almost any of the counties combine. But this year demand growth in China has stalled and that represents a significant change in the environment for producers both in OPEC and outside it."
"The successors to China who will pick up the slack in demand growth aren't quite of a size yet to have the impact that Chinese growth has had. So the demand picture is fairly frightening from a producers' point of view."