Cheap Oil Trumps Yuan Drop in China’s Thirst for Hoarding Crude

Oil’s slump makes crude so attractive to China that even the biggest drop in its currency since 1994 probably won’t deter its ambition to hoard supplies.

China devalued the yuan for a second time after Tuesday’s record reduction in the daily reference rate, setting up the currency for its biggest two-day loss in 21 years and making imports of dollar-denominated commodities costlier. That won’t significantly slow crude purchases to fill strategic reserves, which have helped the nation overtake the U.S. as the world’s biggest oil importer, according to Energy Aspects Ltd., KBC Advanced Technologies and Nomura Holdings Inc.

“While devaluing the yuan will make dollar purchases more expensive, it’s important to place that move in the broader context of the drop in crude,” said Virendra Chauhan, a London-based analyst at Energy Aspects. “If you think about where we were trading last year, you’re talking about a 50 percent reduction in crude, and the currency impact is nowhere near that.”

As a glut driven by surging output from U.S. shale fields and OPEC producers dragged down benchmark oil prices over the past year, China sought to take advantage of the slump and build a strategic petroleum reserve to stock emergency supplies. Those purchases by the world’s second-biggest oil user may help alleviate a global oversupply estimated by Goldman Sachs Group Inc. at about 2 million barrels a day.

Record Imports

More than 80 million barrels of new strategic reserve capacity is scheduled to start operations this year, and China will continue purchases to fill those tanks, according to Chauhan.

Filling emergency inventories accounted for 49 million barrels of crude imports in the first half of this year, or about 268,000 barrels a day, according to Citigroup Inc.

The nation’s total overseas purchases increased to 30.71 million metric tons in July, equivalent to about 7.3 million barrels a day, according customs data. That’s higher than December’s 30.4 million tons, a previous monthly record. On a daily basis, China imported an unprecedented 7.4 million barrels in April and 7.2 million in June.

“We see 7 million barrels a day being the new norm for Chinese imports,” Chauhan said.

China’s surprise devaluation of the yuan is its latest effort to bolster the economy, which is forecast to grow at the slowest pace since 1990 this year. Speculation that raw material demand will slow in the world’s biggest consumer of energy, metals and grains has contributed to a 13 percent decline in the Bloomberg Commodity Index in 2015.

Low Prices

“This is just a small depreciation move by China,” Gordon Kwan, a Hong Kong-based analyst at Nomura, said in an e-mail. “We doubt there is much impact in changing the prevailing demand/supply dynamics of the oversupplied crude market. Hence oil prices will stay depressed and China SPR will continue to be brisk to exploit decade low prices.”

Output by the Organization of Petroleum Exporting Countries is near the highest level since 2008 as it maintains a policy of seeking to defend market share amid a global glut. The largest U.S. production in more than three decades has reduced America’s need for imports, leaving suppliers competing to ship cargoes to other markets such as Asia.

Brent crude, the benchmark for more than half the world’s oil, dropped 0.7 percent to $48.85 a barrel in London by 12:05 p.m. Singapore time. West Texas Intermediate futures, the U.S. marker, was 0.4 percent lower after closing at the lowest level in more than six years on Tuesday. Both are down more than 50 percent from a year earlier.

“I don’t think China’s SPR buying will be impacted by the change in China’s rates because oil prices are still very low and there is more than enough supply,” Ehsan Ul-Haq, a senior market consultant at KBC in London, said by phone. “Before prices start rising, it is a good opportunity to fill strategic reserves.”

— With assistance by Sharon Cho, and Jing Yang

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