The reason why oil is down so much today
Chinese oil storage tanks at its strategic reserve in Ningbo, Zhejiang province.
Oil has rallied dramatically over the past several months in lockstep with the stock market. The price of oil had fallen too far too fast, but at just under $70/barrel it might also have gotten a little ahead of itself during its recent rally.
There is a number of reasons why oil is down $2.60 and counting today...the stock market is down, this morning's oil inventory report was way worse than expected (a 2.9 million barrel increase instead of the 2 million barrel drop that analysts expected), and the U.S. dollar is higher. However, this particular piece of news that I haven't see much coverage of may be the single biggest factor in today's drop in the price of oil...
China suspends oil stockpiling program for now
China has reportedly decided to stop stocking its emergency oil reserves until additional storage tanks can be built. The Chinese government has nearly filled its four existing storage tanks (50 tanks, each with 100,000 cubic meters capacity) that it built on its Eastern coast.
For the next stage of its storage operation, the country plans to build underground caverns and storage tanks further inland. Construction of the second phase will start soon, but there obviously will be a delay before China can resume its stockpiling.
China currently has enough storage capacity to hold 30 days worth of oil for the country. It's ultimate goal is to have a stockpile of 90 to 100 days. That's a lot of additional demand for oil...it just will be a little while before it resumes.
Long term, if the global economy recovers...particularly in Asia and the U.S. dollar continues to weaken the story for oil is very bullish. Short-term I would not be surprised in the least to see oil pull back even further. I personally will consider adding to my favorite oil stocks on any weakness.
Here's another interesting article on China's oil storage capacity:
China warily permits a peek into its oil reserves