Use access key #2 to skip to page content.

TMFDeej (99.47)

The reason why oil is down so much today

Recs

26

June 03, 2009 – Comments (9) | RELATED TICKERS: USO

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

Deej

9 Comments – Post Your Own

#1) On June 03, 2009 at 2:05 PM, cbwang888 (25.84) wrote:

For economic and military reasons, China will continue to stockpile energy resources and basic materials.

Today USD and T-bonds rebounce may be just a short term thing (gift from China) as Tim Geithner is visiting China.

 

Report this comment
#2) On June 03, 2009 at 2:36 PM, jstegma (29.93) wrote:

Excellent analysis.  I agree completely.

Report this comment
#3) On June 03, 2009 at 2:47 PM, portefeuille (99.75) wrote:

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. 

...

China currently has enough storage capacity to hold 30 days worth of oil for the country.

----------------------

China warily permits a peek into its oil reserves

NINGBO, China (Reuters)

China has rushed to fill its four strategic oil bases since oil prices fell last year and will now build a second, bigger set of bases to expand its capacity, with the eventual aim of having enough to cover 90 days of imports, three times more than now.

...

Zhenhai, the biggest of the four bases, comprises 52 storage tanks, each of 100,000 cubic meters, giving a total 5.2 million cubic meters capacity that can store around 32.7 million barrels of oil, equivalent to 16 tankers of imported crude.

"Fifty of the 52 tanks are full," Zeng said. "Two tanks are not filled in case others malfunction. All the strategic reserves operate like this."

...

(from the article you linked to) 

----------------------

China eyes 100-day crude reserves

Bloomberg
Published: April 14, 2009, 23:11

Beijing: China, the world's second-largest energy user, aims to build emergency crude oil reserves to meet 90 to 100 days of domestic demand, Zhang Guobao, the head of the National Energy Administration, said.

"Our ultimate reserve target is to meet the level of countries in the Organisation for Economic Cooperation and Development (OECD)," Guobao was quoted as saying by China National Petroleum Corp., the country's biggest oil producer, in a company newsletter on Tuesday.

The Paris-based OECD group comprises 30 nations, including the US and Japan. China is not a member.

China is aiming to take advantage of weakened oil prices amid the global recession to build stockpiles, the National Development and Reform Commission, the top economic planner, said last month. The government started filling four oil reserves sites on the east coast last year and will build 26.8 million cubic metres of storage under the second phase.

China plans to construct underground caverns and storage bases in inland regions under the second phase, Zhang said. The government will start building eight storage sites in cities, including Huangdao and Jinzhou this year under the later phase, state-run China Central Television said in a report on February 3.

The four stockpile bases representing the first phase will hold the equivalent of 30 days of oil imports, China National said in the newsletter. China imported 178.9 million metric tons, or 1.3 billion barrels, of crude oil last year, adding to 189.7 million tonnes of domestic production, government data showed.

China's commercial oil reserves are currently sufficient to meet 21 days of consumption.

(from here)

----------------------

China oil consumption increases 4% in April

By Ryan Williams

NEW YORK (MarketWatch) - China, the second biggest oil consumer, increased oil consumption by 4% in April, the first year-on-year gain in six months, according to a report released by energy information provider Platts on Thursday. The nation used-up 31.47 million metric tons of oil last month, which may signal its massive stimulus plan may be propping-up demand for energy and materials, the note said. The increase in demand from "China is another signal to the markets that the first seedlings of a broad stabilization and recovery in oil demand are starting to poke through around the world," said Dave Ernsberger, Senior Editorial Director for Asia at Platts, in the report. July crude oil futures are currently trading at $60.88 per barrel, down $1.16 on the New York Mercantile Exchange.

(from here) 

----------------------

 

Taking the information from the last article they consume around 1 million metric tons per day, have reserves for around 30 days, so they have reserves of around 30 million metric tons. 

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.

Thus "50 tanks, each with 100,000 cubic meters capacity" is only around 20% of their current storage capacity. Just wanted to clarify that, I think you implied that by mentioning "four existing storage tanks" ...

Report this comment
#4) On June 03, 2009 at 3:02 PM, portefeuille (99.75) wrote:

(the conversion of "metric tons" to barrels of crude oil depends on the sort of crude oil (see here). 1 metric ton is equivalent to around 7 barrels.)

Report this comment
#5) On June 03, 2009 at 3:27 PM, portefeuille (99.75) wrote:

(the conversion of "metric tons" to barrels of crude oil depends on the sort of crude oil (see here). 1 metric ton is equivalent to around 7 barrels.)

((this is of course because a metric ton or tonne (t) is a measure of mass (1t = 1000 kg) and a barrel is a measure of volume (1 barrel = ca. 158.9873 l = 0.1589873 m^3) and the density of crude oil depends on the source ...))

Report this comment
#6) On June 03, 2009 at 4:07 PM, TMFDeej (99.47) wrote:

I personally think that we are due for a small pullback in oil.  We will probably see $60/barrel before we cross the $70 threshold...which will eventually happen.

Deej

Report this comment
#7) On June 03, 2009 at 5:18 PM, PIGMA (29.84) wrote:

TMFDeej,  

What are your favorite long term oil stocks that you would like to pick up if they pullback?

Report this comment
#8) On June 03, 2009 at 5:20 PM, automaticaev (31.22) wrote:

yes buy oil soon

Report this comment
#9) On June 03, 2009 at 5:32 PM, TMFDeej (99.47) wrote:

Hi nrvbrokerage.  TMF disclosure rules prevent me from discussing my favorite oil play specifically because I added a small position to it less than 10 days ago when I sold something else. 

I can tell you though that I like dividend-paying, conservatively run E&P companies with exposure to both oil and nat gas, particularly CANROYs...though many MLPs would qualify as well.

Deej

Report this comment

Featured Broker Partners


Advertisement