As Brent crude prices tumbled by more than $3 on Monday, top energy firms announced they are cutting back on crude oil purchases and are seeking to boost their emergency oil stockpiles to shield the global economy from a potential supply shock.
While this demand from the world’s top crude buyers does not increase significantly the supply of oil that could cause crude prices to skyrocket, its visible impact should provide more clarity as oil markets probe further to determine if the latest price drops represent something more significant and lasting.
The biggest stockpile demand came from China, which officials said they intend to expand and maintain their emergency petroleum stockpiles.
“We are reinforcing domestic reserves for emergency oil and energy supply,” said a government spokesperson earlier this month.
On Friday, October 26, China reported they have raised their stockpile of oil by nearly 1 million barrels for the week ended October 26th.
The move comes after the U.S. has dramatically increased the amount of crude it holds domestically in private inventory over the last few years. In the wake of the global oil prices decline in the wake of the November 2016 OPEC decision to significantly reduce the supply of crude, the U.S. purchased enough to refill nearly two years worth of emergency stockpiles at a current price of about $48 a barrel.
Those stockpiles were raised above their historical average after prices soared to over $100 in late 2014, and exceeded its target to include one year of over-production when prices reached nearly $100 a barrel in mid 2015.
According to estimates from Bloomberg, the U.S. currently has 11 days of commercial crude stocks. The largest domestic petroleum reserves in the world are held by OPEC which is sufficient to cover almost 32 weeks of petroleum requirements in member countries in light of the amount of oil that is produced in the Persian Gulf. It holds more than sufficient to serve almost nine months of demands at current price levels.
The need for stockpiles for a significant portion of OPEC member countries will become a concern for producers of the global economy.
On Sunday, Saudi Arabia’s oil minister Khalid Al-Falih said that Saudi Arabia was significantly stepping up crude purchases in the coming months for strategic reasons.
“We see price stability as absolutely essential,” said Falih. “We are very optimistic we are going to have a good period of stability in the market, which means higher prices. It’s a greater trade off when prices are high versus high prices.”
For America, the federal reserve’s strategic petroleum reserve is an extraordinary source of American crude. It is designed to protect U.S. domestic consumers and the U.S. economy from price shocks. One of the restrictions on buying stocks are to ensure a level of not more than 180 days of consumption.
In August 2018, during former President Obama’s presidency, the government published for the first time a list of all its reserves. The following month, Washington began approving exports of emergency oil from this emergency reserve and started adding to the reserve’s supplies.
Saudi Arabia is the second largest oil producer behind the U.S. and the second-largest importer of oil.
It is not yet clear what to expect if the sustained periods of lower oil prices could last long.