China Announces Release of Crude from Strategic Reserve with Explicit Aim of Lowering Prices

Crude oil prices took an intraday hit on Thursday after China surprised traders with a first-time intervention in the global market, announcing the release of crude from its strategic reserve with the explicit purpose of lowering prices.

The announcement came shortly after the country reported a jump in factory-gate inflation on Thursday. Surging energy costs in China are becoming a political headache for government officials, which likely prompted the unprecedented move. High oil prices are not the only concern, coal and natural gas prices are also rising, leading to electricity shortages in some provinces that have forced some factories to cut production.

International-benchmark Brent crude plunged as much as $1.36 a barrel to $71.24 in London, erasing earlier gains. U.S.-benchmark West Texas Intermediate had a similar reversal to the downside.

China’s Factory Inflation Hits 13-Year High as Materials Costs Soar

China’s factory gate inflation hit a 13-year high in August driven by roaring raw materials prices despite Beijing’s attempts to cool them, putting more pressure on manufacturers in the world’s second-largest economy, Reuters reported.

The producer price index (PPI) rose 9.5% from a year earlier in August, the National Bureau of Statistics (NBS) said on Thursday, faster than the 9.0% increase tipped in a Reuters poll and the 9.0% reported in July. That was the fastest pace since August 2008.

China’s economy has recovered strongly from last year’s coronavirus slump but has been losing steam recently due to domestic COVID-19 outbreaks, high raw material prices, tighter property curbs and a campaign to reduce carbon emissions, Reuters reported.

China to Auction Off State Oil Reserves to Help Refiners

China’s state reserves administration said on Thursday it would release crude oil reserves to the market via public auction to ease the pressure of high feedstock costs on domestic refiners, Reuters wrote.

The release will be made in phases and is mainly for integrated refining and chemical plants, the National Food and Strategic Reserves Administration said in a statement. That potentially rules out the participation of some smaller, independent refiners known as “teapots”.

The move will “better stabilize domestic market supply and demand and effectively guarantee the country’s energy security,” the administration added, without specifying the volume of crude it would sell or when.

No Long-Term Effect on Prices Expected

The move by China to offer relief from higher oil prices by releasing crude from its strategic reserve is a first-time event and may be the only time it makes such as move as Beijing, the world’s biggest crude oil importer, is famously secretive about its strategic petroleum reserve (SPR).

Prices may feel some short-term pressure, but the decision should have a limited effect over the long-run. Most energy experts expect to see limited further draws in China’s onshore crude inventories this year and a resumption of higher imports into year-end due to increased seasonal demand.