Food for thought: Asian oil buyers have little room for maneuver with SPRs

The word “strategic” in the phrase Strategic Oil Reserves is there for a reason and no one understands it better than Asia’s biggest oil importers.

With the energy security aspirations of Asia’s four largest oil importers – China, India, Japan and South Korea – perpetually vulnerable to global price fluctuations, they have increasingly expanded their SPR capacity. over the past decades – an effort to ensure they have emergency oil storage. a facility that can be used to mitigate disruptions in the oil supply.

But when crude oil prices crossed $ 85 a barrel earlier this year, Asian oil importers feared it could derail a fragile economic recovery. As a result, for the first time, countries like India and China have turned to strategic oil reserves to cushion the impact of rising prices.

Market sources unanimously believe that Asian importers will be reluctant to release huge volumes of SPR and make it a continuing trend, just like a cushion for high prices

The market has also seen coordinated SPR launches by Asian consumers, as well as the United States. While the market’s reaction to the move has been subdued so far, largely because actual releases fall short of expectations, traders have a key question in mind: will this be a trend continues?

“The fact that China and India are large net importers of oil adds a layer of uncertainty. They will therefore probably seek to replenish their strategic reserves at some point. This will add some degree of market support down the road, potentially at an even higher crude level. price, ”said Paul Sheldon, chief geopolitical advisor at Platts Analytics.

Immediately after the White House announced on November 23 that the United States would release 50 million barrels of its SPR early next year, India, China, South Korea and Japan followed suit. and announced their intention to release SPRs.

While India has agreed to release 5 million barrels of crude, China is expected to release more crude from state reserves as the second round of auctions could potentially include at least 7 million barrels of blended crude Moderately soft ESPO.

South Korea has agreed to release 3.17 million barrels of its SPRs, including 2.08 million barrels of crude oil and 1.09 million barrels of refined products, over a three-month period starting in January.

And Japan’s sales of national oil reserves will be done by advancing its planned sales of replacement crude oil into national oil reserves without violating the country’s oil storage law. Sales could amount to around “a few hundred thousand kiloliters,” according to Economy, Trade and Industry Minister Koichi Hagiuda.

It’s a different story in Asia

Market sources unanimously believe that Asian importers will be reluctant to release huge volumes of SPR and make it a continuing trend, just like a cushion for high prices.

Take the example of India. The country has an SPR capacity of 5.33 million tonnes. And for the second phase, the federal cabinet has given its approval to build an additional 6.5 million tonnes of SPR. While the first phase, which is fully filled, can meet about 9.5 days of India’s crude oil requirement, the second phase will add an additional 12 days.

“While Indian state refiners also hold substantial volumes of oil, the overall volumes are not large enough. a disruption in supply, ”said a major oil industry source.

Asian countries have followed a pattern of building SPRs similar to that of the United States.

While the idea of ​​storing emergency oil in the United States arose as early as 1944, it took the 1973-74 oil embargo to stimulate the creation of the strategic oil reserve.

But for the United States, growing shale and a large SPR balance offer the country the opportunity to sell SPR shares to fill budget deficits, as Congress has done with budget bills since 2015, as well as to promulgate price-related publications without ever needing to turn the barrels.

According to Platts Analytics, Congress appears determined to sell the majority of SPR for tax reasons. The large deliveries required until 2031 are expected to reduce the reserve balance to 316 million barrels, from 695 million barrels in 2016.

This would undoubtedly reduce the flexibility to release strategic inventory during a supply disruption, as the SPR was originally intended. But despite this, the risks for the United States would be much lower due to the growth of their shale sector, compared to some Asian countries like South Korea, which imports 100% of its oil needs, and the India, which ships 85% of its oil needs. .

More than one way

Asian energy analysts and top energy industry executives believe there are more effective ways to bring energy-related inflation under control, such as lowering fuel taxes, while leaving SPR volumes intact. to serve as a cushion during major geopolitical events such as war.

Even major Asian refiners, such as SK Innovation, Cosmo Oil, ENEOS, PTT, BPCL, shared similar views.

For example, in South Korea, the Ministry of Economy and Finance decided to reduce taxes on automotive fuels by up to 20% for six months from November to reduce prices at the pump.

And in Japan, the Ministry of Economy, Trade and Industry decided to grant subsidies to curb increases in the retail prices of gasoline, kerosene, diesel and fuel oil from the end of December to end of March.

OPEC and its Russian-led allies have pledged to continue increasing production for January, despite their own predictions of an impending oil surplus. They agreed in early December to increase quotas by 400,000 bpd, as prescribed by its supply pact.

Although OPEC and its allies are taking a cautious approach, Asian refiners believe producers are increasing production at a slower rate than desired.

“The release of strategic stocks in the absence of a major supply disruption, for the sole purpose of influencing prices, sets a precedent that could have a lingering effect on the market and OPEC + production decisions. added Sheldon of Platts Analytics.

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