Geoffrey Craig, Senior Product Strategist
In a previous article in this series, we discussed how China’s crude oil inventories can serve as an early warning indicator if the country’s storage reaches unusually high levels.
In preparation for potential military action, experts say China would likely stockpile crude oil to secure ample reserves of this critical resource, which is essential for both its economy and military operations.
Utilizing Ursa Space’s proprietary Global Oil Inventories dataset, we looked specifically at China and found current levels were comfortably below historical averages.
While this dataset allows you to track crude oil inventories, further questions must be considered to determine whether China is intentionally stockpiling these reserves—a topic we will explore in this article.
The underlying assumption is that China may proactively build up its crude oil inventories to be tapped in event of a naval embargo or blockade cutting off imports due to military action.
This implies that inventories would need to display a consistent “fill and hold” pattern, approaching the upper limits of operational capacity, before any definitive conclusions can be made.
Otherwise, one might misinterpret ordinary fluctuations driven by commercial factors, such as adjustments in refinery runs to meet seasonal demand.
Imports Needed
If China chooses to stockpile crude oil for strategic purposes, the most likely approach is increased imports.
The other two options—rationing demand or boosting production—would either result in significant economic disruption or may be technically infeasible.
Therefore, using import statistics alongside crude oil inventories may offer a clearer picture than relying on either one alone.
Strong imports combined with inventory builds are more indicative of a deliberate stockpiling strategy than if the primary factor were simply weak refinery runs.
This combination of rising imports and growing inventories was once commonplace.
For decades, China’s crude oil imports increased annually, reflecting both its ambition to expand inventories and its growing demand as the country’s refinery capacity rapidly expanded.
China’s crude oil imports increased every year from 2001 (1.2 million barrels per day) to 2020 (10.85 million bpd), marking an impressive 19-year streak.
After a two-year decline, imports rebounded to a record high of 11.29 million bpd in 2023.
However, there’s a sense that imports have peaked and may not continue to rise. Through August 2024, imports have been lower than during the same period in 2023, reinforcing this sentiment.
China’s sluggish economy has dampened the outlook for crude oil demand. The long-term forecast is further weighed down by the country’s shift toward electric and hybrid vehicles, which will inevitably reduce demand.
As fewer imported barrels will be required to meet this shrinking demand, the definition of “strong imports” will need to be recalibrated. Even if imports fall short of the 2023 record high, they could still be substantial enough to drive inventory growth.
The earlier argument remains valid: strong imports combined with rising inventories are still the key indicators that may signal an intent to stockpile crude oil.
In this series, we have so far focused on commodities—an often overlooked yet crucial aspect of war preparations. Typically, attention is directed toward the military dimension, which is what we will explore next.
