Terms like "historic" and "unprecedented" usually apply to events of some major significance, but energy analysts have been reaching for such superlatives to describe a minor sale of oil from China's secretive Strategic Petroleum Reserve (SPR).
Experts have argued that the announcement of the oil sale last month fully deserves such attention because it was the first of its kind in the 17 years since China began building its strategic stockpile of crude.
China has been "hoarding" oil for well over a decade to shore up its energy security, said a commentary published by oilprice.com on Sept. 14.
"That's why it came as such a surprise this week when China made a historic decision to sell off some of the oil it has been stockpiling in a strategic reserve for years now," it said.
Even so, the auction of 7.34 million barrels of stored SPR oil on Sept. 24 conducted by the government's virtually unknown National Food and Strategic Reserves Administration (NFSRA) spurred more questions than answers about China's economic policies, energy security and dependence on foreign oil.
One primary question focused on the purpose of the sale and the small volume offered to a closely controlled list of buyers, since the quantity was the equivalent of just 70 percent of China's average oil imports per day.
In an analysis, the China Energy Research Program of the Oxford Institute for Energy Studies (OIES) called the quantity "a drop in the ocean compared to China's total imports," making it unlikely to affect global prices or import flows.
The NFSRA's list of qualified buyers was also whittled down to "integrated refining and chemical plants," stipulating that the crude was to be used mainly for "chemical and chemical fiber" production, the OIES report said.
The restrictions appeared to be aimed at minimizing rather than maximizing the impact of the sale. The report concluded that the auction amounted to a practice run aimed at establishing a "release mechanism" for future sales from the SPR stash.
The new authority of the NFSRA over the SPR sale seems to support that conclusion. The agency recently surfaced as the organizer of auctions for sales of non-ferrous metals including copper, aluminum and zinc from state reserves.
NFSRA has announced small releases of the metals in four batches since June, marking the first such sales since 2010, Reuters reported.
The sales have been aimed at easing shortages of the metals among domestic manufacturers and limiting the surge of commodity prices that has accompanied the recovery from the COVID-19 crisis this year.
While the impact of the small sales on shortages and commodity prices remains debatable, the effect may also be limited by the government's non-disclosure policy regarding the extent of its reserves.
The inclusion of strategic oil under the NFSRA's remit suggests that the sales may be aimed at slowing the growth of commodity prices generally for the benefit of the economy.
SPR sales may follow a similar course with a series of moderate releases that create more uncertainty for speculators than a major price impact.
The first announced sale of SPR oil may also serve as a reminder of a major difference between China's policies on strategic stockpiling and those of International Energy Agency (IEA) member countries. China has maintained secrecy over its SPR transactions since the government decided to build an emergency inventory in 2001.
Unlike the IEA member countries that agree to coordinate their use of strategic stocks in cases of supply disruptions or emergencies, China has made no commitment to transparency for market stability and has not ruled out sales to influence market prices.
Supply and demand
On Wednesday, U.S. Energy Secretary Jennifer Granholm told the Financial Times that a release of crude from the U.S. Strategic Petroleum Reserve is also "under consideration" to increase supplies.
Washington has been disappointed with the slow pace of increases by the OPEC+ group of oil producing countries, as rising prices threaten to stall economic recovery.
U.S. releases from its SPR to ease prices have been rare but not unprecedented. The major difference with China's SPR policy is transparency.
Inventories, additions, exchanges and drawdowns from the U.S. stockpile are regularly reported by the Department of Energy (DOE). As of last Oct. 1, the SPR held 617.8 million barrels of crude, the DOE's website said.
By contrast, public information on China's SPR has been scant.
In fact, last month's announcement of the first SPR sale is just that -- the first announced sale. China's authorities have provided so little current data on inventories that it is hard to know whether transactions have taken place in the past or not.
Over the years, China has largely kept silent about when or by how much it has been filling its SPR storage, leaving analysts to piece together estimates from customs figures, commercial data and refinery rates.
Under its 10th Five-Year Plan (2001-2005), China outlined three phases of building storage facilities by 2020 to match the IEA standard of providing 90 days of import coverage, but it remains unclear whether the accounting has included some commercial stocks held by national oil companies (NOCs).
In the rare cases when official agencies have provided SPR inventory data, it is unclear whether the purpose was to clarify or cloud interpretation.
In April 2017, for example, the National Bureau of Statistics (NBS) reported that the SPR stockpile had risen to 33.25 million metric tons (243.7 million barrels) as of "mid- 2016," disclosing figures that were already 10 months out of date.
At the time, the data suggested that the SPR held less than a month of import coverage.
In January 2018, the NBS said that "national oil reserves" had reached 37.73 million tons by the end of June 2017, leaving it unclear whether the volume referred exclusively to the SPR.
In keeping with its policy of non-transparency, China has been equally opaque about its motives for maintaining secrecy on SPR inventory levels and activity.
"I think the transparency is in part because the administrations managing the SPR have been fragmented and also due to concerns about energy security vulnerability," said Michal Meidan, director of the OIES China Energy Research Program, in an email.
At times of record low oil prices, as during the pandemic slump of 2020, analysts have concluded with some confidence that China was filling its SPR tanks, but there has been less certainty about estimates when prices are high.
Foreign dependency
China's reticence with regard to reserves may give it some advantage in buying for storage, but concerns about energy security are likely to be paramount in a country that relied on imports for over 73 percent of its crude and 44 percent of its gas last year.
"While the Chinese government did say at the outset that the SPR was both for emergency response and market management, managing both strategic and corporate stock levels has likely been challenging, and the government remains first and foremost concerned with strategic vulnerabilities," Meidan said.
In recent years, China's push to build gas storage facilities to alleviate winter shortages has followed much the same path as the development of its SPR.
China's SPR secrecy has led to more sophisticated analytical tools to distinguish between demand for current consumption, commercial stocks and storage for the longer term.
Among the most memorable and graphic tracking tactics was featured by The Washington Post in a 2016 report on a California-based "geospatial analytics and software firm" that used satellite imaging and shadows cast by the floating roofs of storage tanks to calculate oil inventories.
The company, Orbital Insight, concluded that China had built four times as many tanks for its SPR and commercial stocks than the industry had previously estimated.
While SPR stockpiling has arguably enhanced China's energy security, its non-disclosure policy may serve to highlight its vulnerability, its exposure to unreliable import routes and its relative lack of allies.
The decision to start selling SPR oil that took so long to accumulate may mark a turning point for energy security concerns, now that the country has advanced toward its 90-day coverage goal. But it is more likely to reflect short-term fears about commodity price spikes, inflation and the destabilizing effect on economic growth.
"I think there will be more transparency going forward, at least on the SPR and CPR (commercial petroleum reserve) tanks, especially if this is about institutionalizing mechanisms," Meidan said.