China has proven it can have its cake—and eat it too.
As the largest commodities importer, Beijing often buys raw materials above and ahead of its needs, saving a meaningful portion for that rainy day when supplies might be too tight to acquire, or prices too expensive. At that point, the Chinese would tap what they have in their stockpile to keep their economy humming along. 
The strategy has worked so far for grains and metals. And on Thursday, China proved it can work for oil too. Making an unprecedented intervention in the global oil market, China released crude from its strategic reserve for the first time with the explicit aim of lowering prices. The manoeuvre paid off, sending crude prices down almost 2% on the day.
The question, though, is how long can the Chinese win at this.
There’s a huge difference in dealing with individual countries like Brazil and the United States for your soybeans and Chile and Russia for your copper, as opposed to dealing with an alliance like OPEC+ for your oil.
OPEC+ Will Intervene
With grains and metals, when you cut your buying, the sellers in the producing countries will typically let prices drop enough to get your business back. With the Organization of the Petroleum Exporting Countries (OPEC) and its allies, however, the opposite is likely to happen. Once prices start falling steadily and significantly, the alliance would gang up to cut production, and send the market back up—often to a higher level than it had fallen from.
We’ll have to figure out how long and deep the Chinese can go at this game and how much tolerance will be shown by the 23-nation OPEC+, which comprises the 13-member Saudi-led OPEC and its ten oil producing allies steered by Russia.
Let’s look at what we have so far:
In a statement late Thursday, China’s National Food and Strategic Reserves Administration said the country has tapped its oil reserves to “to ease the pressure of rising raw material prices.” The agency didn’t offer further details, but people familiar with the matter told Bloomberg that the statement referred to millions of barrels the government offered in mid-July.
To those who may have forgotten, headlines from some two months ago suggested that China had started to slow its buying of crude—in the same way it had squeezed copper imports earlier. But the market disruption in oil then was too small and the story died down within a couple of days, allowing crude prices to resume their upward trajectory after a brief downside.
China Hints That Stockpile Releases May Last a While
This time, though, the Chinese stockpiling agency intended to let the impact linger and phrased its action in more carefully thought out language. It said a “normalized” rotation of crude oil in the state reserves is “an important way for the reserves to play its role in balancing the market,” indicating that it may continue to release barrels. To be sure, the agency said that putting national reserve crude oil on the market through open auctions “will better stabilize domestic market supply and demand.”
It's clear why Beijing is doing this. Surging energy costs in China, not just for oil but also for coal and natural gas, and electricity shortages in some provinces are already forcing some factories to cut production. Inflation is rapidly rising too, a political headache for Beijing.
China’s factory-gate inflation accelerated in August to a 13-year high, just a month after the White House publicly asked OPEC+ to pump more crude amid rising gasoline prices in the United States. Together, the actions in Beijing and Washington suggest that the world’s two largest energy consumers see $70 - $75 a barrel as a red line for the price of oil. To add to the stress of the two countries, Hurricane Ida has also severely disrupted a swath of US crude production since the end of August, affecting supplies to China’s Unipec.
China is often secretive about the exact amount of barrels it has in stockpiles. The last public figures for its so-called SPR, or Strategic Petroleum Reserve. were given in 2017, when it was revealed total reserve capacity of 37.73 million cubic metres, or 237.66 million barrels, of crude oil.
China Reserves Estimated at 220 Million Barrels
According to Energy Aspects Ltd, the world’s largest oil importing country has built up an estimated reserve of 220 million barrels over the past decade. The buffer differs from other SPR levels held in the US and Europe, which are only tapped during supply outages and wars. China however is signalling it is willing to use its reserve to try to influence the market
With China emerging as the third negative force against oil, the demand outlook for oil becomes more questionable. Beijing isn’t just a cheerleader of commodity supercycles; it can also be a silent bear when prices aren’t going its way or hurting its economy.
But some longtime observers of the oil market, like John Kilduff of New York energy hedge fund Again Capital, says China’s hand in this situation may just be overrated.
“Based on their past success with metals and other commodities, they think they have the Midas touch to manage the inflation in their economy through oil price controls too,” said Kilduff.
“They may have some levers to pull but it’s never going to be too lasting, given the counter-reaction we can expect from OPEC+. Over the longer run, China will probably find out the hard way that it’s hard to keep at this.”
Since taking back control of the demand-decimated oil market from the height of the coronavirus pandemic, OPEC+’s unyielding production cuts have enabled crude prices to trade at multiples of their lows of 2020. The alliance has only now started adding to output, but can roll back at a blink any additions should China’s stockpile releases prove too detrimental to the market.
Impact on Prices From Reserves’ Use Waning
Kilduff said the impact of SPR as a market balancing tool itself was waning across the world.
“One proof of this is the US stockpile release whenever market conditions get too tight. No one really pays any attention to that anymore, and the price of crude barely drops more than a blip each time they do that with the SPR in the United States.”
And while both crude benchmarks—UK-based Brent and US-based WTI—were trapped below $75 a barrel now, Kilduff expects a breakout during the cold season of the northern hemisphere.
“The winter will play into demand for heating oil for sure, but also expect a pop in all forms of distillates, including jet fuel, should international travel pick up from any withering in the impact of COVID.”
But some think China can do plenty to cool the market.
Osama Rizvi, energy analyst at Primary Vision Network, says oil may not hit $100 a barrel despite the demand hype for it, and China could be a big factor for that.
Said Rizvi:
“China amassed a huge amount of oil when prices hit a 20 year low and as prices continue to rise, China will be increasingly incentivized to tap its reserves rather than import expensive oil. While this is unlikely to change the underlying fundamentals of oil markets, the reduction in Chinese imports is certainly one of the factors that could finally drive a shift in oil market sentiment."
Bottomline: China’s immense power in influencing both the demand and price of oil should not be taken lightly.
Equally, OPEC+’s determination not to allow another crash in oil prices and the impending winter season demand for heating oil, shouldn’t be ignored either
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.