China intervenes in oil market with historic sale of reserves

[SHANGHAI] China made an unprecedented intervention in the global oil market, releasing crude from its strategic reserve for the first time with the explicit aim of lowering prices.

The announcement comes amid surging energy costs in China, not just for oil but also for coal and natural gas, and electricity shortages in some provinces that have forced some factories to cut production. Inflation is rapidly rising too, a political headache for Beijing. Oil slumped.

In a late statement on Thursday, the National Food and Strategic Reserves Administration said the country had tapped its giant oil reserves to "to ease the pressure of rising raw material prices". I

t did not offer further details, but people familiar with the matter said the statement referred to millions of barrels the government offered in mid-July.

The Chinese stockpiling agency also said a "normalised" rotation of crude oil in the state reserves is "an important way for the reserves to play its role in balancing the market", indicating that it may continue to release barrels. The agency said that putting national reserve crude oil on the market through open auctions "will better stabilise domestic market supply and demand".

China is the world's largest oil importer and over the past decade has built a huge reserve of the commodity. The buffer differs from strategic petroleum reserves, known as SPR, held in the US and Europe, which are mostly only tapped during supply outages and wars. China however is signalling it is willing to use its reserve to try to influence the market.

"On its face, it's a pretty clear statement of an intent to use the SPR to dampen oil prices for domestic refiners," said Bob McNally, a former senior White House policy adviser who now runs Rapidan Energy Group, a consulting firm in Washington.

The statement comes after China's factory-gate inflation accelerated to a 13-year high, and just a month after the White House publicly asked the Organization of the Petroleum Exporting Countries (Opec) oil cartel to pump more crude amid rising petrol prices in America. Together, the actions in Beijing and Washington suggest that the world's two largest energy consumers see US$70-75 a barrel as a red line for the price of oil.

BLOOMBERG