China may need to double the size of its Strategic Petroleum Reserve (SPR) to keep pace with demand, a top analyst has predicted.

“While crude imports are likely to slow in 2019, China still needs to double the size of the SPR to 1,085m by 2025 to meet the 90 day import requirement which implies high single digit growth in crude imports,” according to Bernstein senior oil and gas analyst Neil Beveridge.

“China’s SPR is one of the most enigmatic parts of the global demand puzzle. It has accelerated filling of the SPR since 2014, taking advantage of low oil prices.

“More recently however, the rapid build could be due to geopolitical tensions with the US which has prompted China to buy crude oil and gold rather than purchase US treasuries.”

Beveridge says a rapid increase in crude imports, up 25% year-on-year, at the end of 2018 implies an “unprecedented rate of filling” as China diversifies away from the US dollar with purchases of crude and gold.

China launched the SPR plan in 2001 with a target of building a strategic reserve of 90 days import requirements to mitigate against supply disruption.

SPR levels are not captured in official statistics and are one of the reasons global demand is underestimated, says Beveridge.

Bernstein uses a “mass balance approach” between crude inputs and outputs to provide an “indirect method” of estimating SPR fill.

Production and net crude imports are sources of crude whereas refining inputs, commercial storage and crude burn (losses) are uses of crude.

Bernstein says the residual difference between sources and uses of crude provides a proxy for SPR fill.

“China reports SPR fill levels on an ad hoc basis. Since reporting, our estimates have increased at a similar pace, albeit slightly higher than guidance. The last SPR fill guidance in mid-2017 implied a fill of 325m barrels,” says Beveridge.

“We estimate that China may have already reached the target of 550m barrels SPR fill at the end of 2018.”

While China has completed phases one and two of the SPR, which has 313m barrels of capacity, the third phase, which expands SPR capacity to 500m barrels is not expected until 2020.

Bernstein raises the possibility that China is using third party storage to store crude outside of the SPR system.

Bernstein estimates that China’s SPR fill rate will average 200,000 barrels per day over the next five years.

“As such we expect that China’s oil imports will continue to grow at mid-high single digits, and higher than underlying demand growth,” he added.

Tankers

China may need to double SPR to meet 90-day goal