Oil Backtracks After China Taps Strategic Reserve

Oil & Gas

Oil fell by the most in nearly three weeks after China decided to tap its crude reserves to ease a surge in energy costs. 

Futures declined 1.7% in New York on Thursday, following the latest step by the world’s largest importer of raw materials to quell a commodities rally. Oil prices briefly rose earlier in the session after a U.S. government report showed crude stockpiles fell as production tumbled the most on record last week due to disruptions by Hurricane Ida.

“Additional supply coming from the Chinese SPR — reducing the need to import more oil in the near term — has weighed on prices,” said Giovanni Staunovo, a commodity analyst at UBS Group.

In recent days, U.S. benchmark crude has fluctuated near $69 a barrel, with investors weighing the impact of domestic supply disruptions against uncertainty over demand as the pandemic continues to rage. 

China’s move to release oil from its strategic reserves, its most dramatic intervention yet in the oil market, primarily targets domestic refining and chemical firms. It follows similar action the government has already taken in several other commodities markets and adds pressure to oil prices. 

In a late statement on Thursday, the National Food and Strategic Reserves Administration said the country had tapped its giant oil reserves to “to ease the pressure of rising raw material prices.”

A sustained decline in prices demonstrates the market thinks China will keep using their strategic reserves to drive prices down, according to Phil Flynn, senior market analyst at Price Futures Group.

Prices:

  • West Texas Intermediate for October delivery fell $1.16 to settle at $68.14 a barrel in New York.
  • Brent for November settlement dropped $1.15 to end the session at $71.45 a barrel.

As of Thursday, nearly three-fourths of U.S. Gulf of Mexico oil output was still offline after Hurricane Ida hit Louisiana, marking a slower comeback than in the wake of Katrina in 2005. The ripple effects in the market were apparent in the EIA report. Gasoline stockpiles fell by more than 7 million barrels last week, while crude production slid by 1.5 million barrels a day. Crude inventories dropped 1.53 million barrels. 

Physical markets have reacted to the Gulf of Mexico outages with a surge in the value of grades from U.S. Mars Blend to Russia’s Urals. Royal Dutch Shell Plc declared force majeure on “numerous contracts” following hurricane-related disruptions, the company said. One of those contracts included a 2-million-barrel cargo of Mars crude sold to China, according to people with knowledge of the matter.

(With assistance from Alfred Cang, Saket Sundria and Paul Burkhardt.  © 2021 Bloomberg L.P.)

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