Over the past few months, with oil prices at historical lows, China imported more oil than it needed, putting extra capacity into storage and boosting monthly imports to a high of 7.2 million barrels per day in December. According to price reporting agency Platts, around 300,000 barrels per day were likely earmarked for commercial storage and strategic petroleum reserves (SPR). But analysts disagree over how long China’s import streak can continue in the face of rising stockpiles.

While an import boost may have provided a floor for oil prices, the country doesn’t look poised for a massive increase in crude imports unless private companies boost storage capacity faster than anticipated. Analysts say that while importing crude at $50 per barrel is cheaper than a significant portion of domestic production, demand for oil in China is currently tepid.

Over a longer period, a new government policy and action by private companies could boost storage capacity and incremental imports. In the short term, analysts warn that storage projects are likely to take a year to come online, meaning any project not in the pipeline now will have minimal impact this year. Most analysts expect imports will slowly begin to align with actual demand as storage capacity is tapped out. But others are more bullish; in a research note, Bernstein wrote that it expects “stronger demand” in 2015, especially as fuel switching from natural gas to oil occurs. 

Government Policies

A new policy issued late last month requires Chinese refiners to hold between 10 days of processing capacity when crude oil prices are above $130 per barrel and 15 days when they are lower. With more than 14 million barrels per day of refining capacity, Bloomberg estimates that threshold requires refineries to hold between 211 – 141 million barrels. But Suresh Sivanandam, an analyst at oil consultancy Wood Mackenzie, thinks this is unlikely to significantly impact storage levels. “We think they already meet this demand for 15 days,” said Sivanandam.

Analysts say China wants 90 days of crude oil coverage – the recommended amount by the IEA – but it’s unclear if that is just the strategic petroleum reserve (SPR) or if includes private stockpiles as well. According to Sivanandam at Wood Mackenzie, 90 day holdings of imported oil use – China imports around 6 million barrels a day – equates to around 600 million barrels of oil storage capacity. By 2020, that number rises to 700 million barrels.

But SPR is only around 140 million barrels. “If you look at the plans, there’s a large gap,” said Sivanandam.  It’s also what is driving the investment in private storage. Phase two of SPR should be finalized by 2020. In a research note, Bernstein estimates that China can add another 100 million barrels to storage over the coming year.

If China is cagey about its SPR figures, getting a handle on commercial inventories is even more difficult. Wood Mackenzie estimates that CNPC has around 3.7 million barrels of storage. Listed CNPC subsidiary PetroChina didn’t respond to inquiries about their storage capacity. An industry publication put out by the state news agency Xinhua said the country had around 244.6 million barrels of commercial crude stockpiles at the end of 2014.

Complicating matters further is that significant storage volumes are not held by the state or state-owned companies, but instead in private hands. Tracking capacity in China is exceedingly difficult, according to analysts, but according to Sivanandam “our gut feel is [private actors] dominate the capacity in terms of the private storage space.”

But storage held by non-state actors might have big impacts on the market. “Independent storage companies are boosting their tank capacity in the hope of making a profit by selling the oil when prices rise,” said industry expert Philip Andrews-Speed.

As more private companies get into the business of storing oil, hoarding is likely to become a problem. Earlier this month, the government’s top economic body sent investigators to Zhengzhou, in Henan province to investigate gasoline hoarding before an announced price hike (in China, retail prices are set by the government, meaning an announced increase in retail prices can lead to hoarding).

Still, with maturing fields and some domestic production likely to shut-in because of high costs, Chinese production growth is likely to slip by 1%, according to a note by Bernstein Research, meaning China will need to bump up imports.