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Oil crisis — Is it a blessing, real gain for energy-starved China?

Will China succeed in turning the oil crisis into a gain and restoring it, and saving in its treasury close to $400 million a day after the oil crisis and the collapse of oil import prices?

The Organisation of Petroleum Exporting Countries (Opec) agreed with the oil producers allied to it within the framework of what is known as ‘Opec +’ to reduce production by 9.7 million barrels per day in May and June.

Automatically, shale oil production will shrink to approximately 3 million barrels per day.

The cuts will decrease to 8 million barrels per day between July and December 2020. The cut will get reduced again to 6 million barrels per day between January 2021 and April 2022, in order to raise and stabilise the prices collapsed following the crisis. And this represents the equivalent of 10% of global production.

China is the largest importer of crude oil in the world and the oil import bill will be less than it was previously (for the low prices), which may continue in 2020 and 2021.

However, the economic benefits to China will be limited by several factors, including the lack of consumer demand. Also, due to the consequences of the Corona pandemic, the demand is likely to be low for petroleum derivatives, gasoline, and jet fuel and refugee products.

Also, a large part of different industries has stopped as a result of a decline in export rates.

In addition, lower oil prices and instability may make it more difficult for the Chinese government to achieve energy security and its environmental goals, which have been a high priority for Chinese leaders in the recent years.

The oil crisis will also make it difficult for China to achieve the agreed goals regarding the US-China trade agreement as a first stage, as stipulated in the January 2020 agreement.

In sum, lower oil prices will bring meaningful benefits to China, but it is likely to be a somewhat mixed blessing between benefits, challenges, and future goals.

When oil prices collapsed in 2014, low oil prices helped accelerate Chinese economic growth at a rapid pace; such increase and growth may happen again once the epidemic fades and the Chinese economy recovers.

Until then, the drop in oil prices may not be enough to offset the economic effects of closures and quarantines nationwide in China and around the world. It will take a long time.

However, the plunge in oil prices and the abundance of oil supply may create good opportunities for oil buyers and Chinese refineries, as they could potentially take advantage of the vast storage capacity available in China to buy cheap oil for resale or refining later and increase exports of refined petroleum and petrochemical products.

Against this backdrop, the collapse of oil prices and their stabilisation at a low price will provide some relief to the Chinese economy until it gradually recovers from the epidemic.

In 2019, China imported nearly 10.2 million barrels per day of crude oil. A decrease in the price of Brent crude from $67 a barrel in December 2019 to nearly $31.5 a barrel (at the time of writing this article) would reduce China’s oil import bill by $400 million a day, and represent about 1.5% of GDP.

As long as these prices continue to be at the same level, it provides an opportunity for Chinese companies to take advantage of the difference between high country-specified fuel prices and lower imported international crude oil prices (when crude trading is less than $40).

However, the prolonged decline in oil price and stability will make it difficult for oil producers in China to increase oil and natural gas production in China and may force Chinese national oil companies to choose between boosting crude oil domestic production or their final profits through exports of hydrocarbon and petrochemical products by importing oil to be available in abundance and at an attractive price.

China has more than 1.2 billion barrels of this storage capacity (including floating roof capacity and strategic underground storage capacity), or just over 20% of the global storage capacity of 5.8 billion barrels.

Finally, there will still be some challenges for Beijing as the oil prices drop.

State-owned Chinese oil companies, led by giant national oil companies, will find themselves caught between old losing fields and government directives to increase production.

The government in China is likely to be the biggest beneficiary of those changes; low oil prices will help reduce the subsidy bill while subsidising revenues through higher consumption fees and taxes.

It will also an opportunity to meet more future import requirements from cheap LNG linked to its purchase price at the price of oil.
This probably reduces dependence on Russian and Central Asian gas exporters and the availability of abundant crude oil on the market, which provides many opportunities for Chinese suppliers to purchase and export growth.
Source: Gulf Times

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