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What an OPEC production cut really means for China

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The world's second-largest economy is conflicted as far as an OPEC production cut is concerned, one analyst told CNBC.

China is facing a "trade off" between its oil industry and the rest of its economy, Miswin Mahesh, an oil market analyst for Barclays, told CNBC via telephone. Ultimately though, Mahesh asserted that "it is in China's interest that OPEC doesn't cut."

Mahesh explained that on the one hand, the Middle Kingdom's upstream oil industry would benefit from a production cut and subsequent higher prices as its domestic investment is falling. This is due the country's slowing economic growth. But downstream, and for the rest of the economy which relies on imported oil, Mahesh said that a cut might "not be in their interest."

The Organization of Petroleum Exporting Countries (OPEC) agreed to tackle the global supply glut last month by cutting production levels by up to 700,000 barrels per day.

In order to shore up supply as domestic production slows, Mahesh said that China has invested in the oil infrastructure of a number of OPEC countries, including Ecuador, Venezuela, Iran and Iraq. When asked about the incentives behind these particular choices, Mahesh said that these partnerships could provide a secure future source for imports.


China produces 4.15 million barrels of oil per day according to Mahesh, making it one of the largest non-OPEC producers in the world. But with regards to a future oil-related strategy for the country, Mahesh explained that as domestic production drops, China is "expecting to rely on these captive resources."

This could be sooner rather than later as GDP (gross domestic product) data released Wednesday revealed that China's growth for the third quarter of 2016 came in at 6.7 percent, identical to the preceding two quarters. Louis Kuijs, head of Asia economics at Oxford Economics, told CNBC Wednesday that "downward pressures on the industrial side of the economy have not disappeared," and that growth was pivoted on the government's "willing(ness) to continue to prop up growth with credit."

Meanwhile, Sean Levine, director of research and product development at Energy Capital Research Group, suggested that China has an additional strategy to ensure the security of its oil supply.

"China has good potential to serve as a cap on OPEC, primarily due to its strategic petroleum reserves," he told CNBC via telephone.

Levine referenced Orbital Insight data released in September which indicated that China had 600 million barrels in its stocks as of May 2016 – far higher than 234.3 million barrels, his calculation of the country's official September figure – and data which demonstrate that "imports skyrocketed but demand tailed off." According to Levine, "if prices surge (due to an OPEC cut) … China will not want to pay for comparatively more expensive oil," because the country already has nearly as much as it needs.

According to Levine, China had made use of the "rout on crude prices to cherry pick pricing."

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