(Bloomberg) – Some of the oil from China’s bloated storage tanks is returning to the international market as traders seize the opportunity to get cheap crude oil to resell to regional refineries.
The shipments in question, so far only 1 million barrels, have been purchased by trading houses through the Shanghai futures exchange, and loaded from the bag’s many storage tanks that dot the country’s east coast. From these Chinese ports, cargoes were shipped to international buyers who would otherwise have obtained such supplies from producers in the Middle East and Africa.
While China will never compete with Saudi Arabia as a long-term supplier, the drip of crude from the world’s No. 1 importer underscores just how fragile the oil recovery remains. China entered a record wave of purchases to fill its reserves with low-cost supplies, helping prices double from April lows. Purchases are now slowing and some of those reserves are hitting the market just as OPEC and its partners prepare to increase production.
Oil comes from the 14 deposits designated as delivery and storage points for the Shanghai International Energy Exchange oil futures trading contracts. The exchange had a total of 39 million medium sour grade barrels stored as of this July 16, more than 10 times since April 20.
Growing inventories are weighing on the price of oil futures, making it attractive for traders to buy them, accept physical delivery at maturity, and then ship the crude to nearby refineries, according to traders and analysts surveyed by Bloomberg.
Saudi Arabia, Iraq and other countries are helping arbitration to increase its official selling prices. A North Asian refinery could save $ 1 a barrel by taking a shipment of Basrah Light from one of the INEs compared to shipping it directly from Iraq, when delivery discounts, shipping costs, and OSPs are taken into account, according to merchants. Basrah Light represents approximately half of the oil now stored in INE tanks.
“The top OSPs offered the exchange the opportunity to stand out as a regional hub because of its advantage in distance and grade picks,” said Li Li, analyst at Shanghai-based commodities researcher ICIS-China.
Two South Korean refineries bought around 500,000 barrels of Omani crude in warehouses in China, with one of the cargoes already leaving the Dongjiakou port and headed for Yeosu, according to people familiar with the matter.
Becoming a regional supplier was not exactly what INE had set out to achieve when it launched its yuan-denominated futures in March 2018, with the intention of promoting its currency and creating a price benchmark for low-quality crude that they use their refineries.
As demand and oil prices sank amid this year’s pandemic, traders looked for anywhere they could park unwanted barrels. The physical players had delivered 27 million barrels of oil to INE deposits in the first six months of the year, the exchange said in a statement on its official Wechat account. That volume accounted for 57% of all deliveries since debut in 2018. About 40% of new volumes were hedged, according to the exchange.
Earlier this month, London-based BP Plc became the first major Westerner to deliver oil to INE’s Weifang reservoir, owned by Sinochem Hongrun. Days later, Mercuria also sold cargo in the same warehouse for August contracts. Since the beginning of the year, foreign investors contributed 16% of the daily trading volume of yuan contracts, while accounting for 28% of open interest, according to the INE.
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