China Eyes Cheap Russian Oil to Fill Strategic Reserves

China is discussing with Russia for cheaper oil imports as it seeks to refill its strategic oil reserves. It signals China’s intentions to strengthen energy cooperation with Russia, at a time when Europe works toward banning imports due to Moscow’s attack on Ukraine.

Beijing has been discussing with Moscow for additional supplies, which it plans to use for filling its strategic petroleum reserves. The talks are being conducted at the government level with little involvement from oil companies.

Following Russia’s invasion of Ukraine, oil prices have rallied but the price of Russian oil has plummeted as buyers try to stay clear from it in order not to damage their reputation or being swept up in financial sanctions. That creates an opportunity for China to cheaply replenish its vast strategic reserves, which are typically tapped during times of emergencies or sudden disruptions.

Details on volumes or terms of a potential deal haven’t been decided yet, and there’s no guarantee an agreement will be concluded.

The U.S., the UK and Canada placed bans on Russian oil imports and the EU works toward a similar step. However, Russian oil still flows to willing buyers, particularly India and China. Asian nations find heavily discounted oil is an opportunity too good to pass up.

Refiners in China have kept buying Russian crude since the invasion although strict Covid-19 lockdowns in China have dented consumption. Apparent oil demand last month slumped 6.7% year-on-year as strict lockdowns confined millions to their homes. The outbreak has capped further gains in oil prices, although Brent is still up more than 40% this year.

It is estimated that overall stockpiles of China are at 926.1 million barrels, up from 869 million barrels in mid-March, but still 6% lower than a record in September 2020. By comparison, the US Strategic Petroleum Reserve has a capacity of 714 million barrels. It currently holds about 538 million barrels.

China has sold some crude from its strategic reserves last year in a joint effort suggested by the U.S. to tame skyrocketing prices. The action had little impact and caused China to restock at higher prices.

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