OPEC production cut may affect China supply

The surprise decision by major oil-producing nations to modestly trim output may spark China to stockpile more oil and could tighten supplies globally this winter, industry analysts said.

Last week, members of the Organization of Petroleum Exporting Countries (OPEC) agreed on a preliminary deal to cut production for the first time in eight years. OPEC will decide at the group's next formal meeting on Nov 30 in Vienna the details of cutting production by up to 700,000 barrels a day, from a current level of just more than 33 million barrels a day.

Zhuwei Wang, a senior oil analyst with Platts China Oil Analytics in Beijing, said in an email the OPEC move "is likely to ramp up China's crude imports in the next three or six months".

Wang said the Zhoushan Strategic Petroleum Reserve (SPR) phase-two project with a capacity of 18.9 million barrels a day is about to be commissioned in the fourth quarter. That "will trigger crude inflow demand given the rule of thumb that Beijing's determination to improve national energy security, especially SPRs, often overweighs commercial profitability unless dramatic price volatility occurs".

China's growing crude stockpiles have started to draw attention. The Washington Post reported on Sept 29 that Chinese oil inventories stood at about 600 million barrels in May, " substantially more than commonly thought and nearly as much as the US Strategic Petroleum Reserve".

The Post said China's growing reserves could mean that rising demand for crude in the mainland may have come from strategic hoarding and not rising consumption. That could complicate OPEC's move to trim output, the newspaper article added.

Wang said an oil price recovery may also trigger China's domestic investment in crude production which will increase domestic output in the next 10 to 12 months.

Gordon Kwan, an analyst at Nomura, said in a research note that OPEC'S surprise announcement will benefit CNOOC (China National Offshore Oil Corp) the most, followed by PetroChina Co Ltd and Sinopec (China Petroleum and Chemical Corporation).

He also said that the OPEC decision may affect the global crude market this winter.

"The OPEC deal will remove the current overproduction estimate of one million barrels a day from the global oil markets, perhaps even swinging the market into a deficit during the colder winter months. If implemented and enforced, the OPEC deal will force the world to drain down inventories to balance the market," Kwan said.

Anthony Starkey of Platts Analytics said, "If OPEC is truly able to limit production to 32.5 million barrels a day, that revises our price forecast for 2017 upward by $5 to $10 a barrel. This higher price environment raises, to an extent, expectations for supply from non-OPEC producing countries over the medium term."

paulwelitzkin@chinadailyusa.com