China has been buying record volumes of foreign oil as tensions with the United States and energy security concerns climb.
In June, China's oil imports set an all-time high of 12.9 million barrels per day (mbpd), overtaking the previous record of 11.3 mbpd posted only one month before.
In the first half of the year, crude imports of 268.7 million metric tons (1.97 billion barrels) rose nearly 10 percent from a year earlier on an average daily basis, Reuters calculated from customs figures.
First-half imports of 10.78 mbpd were up 6.1 percent from the previous record-setting daily average in 2019.
China's oil imports increased even during the COVID-19 lockdown period in January and February, gaining 5.2 percent year-on-year, and shipments have yet to slow down.
Inbound supplies have clogged China's ports as dozens of tankers sit offshore, Argus Media reported on July 17.
Thirty-one very large crude carriers (VLCCs), each capable of carrying some 2 million barrels, have been turned into floating storage with wait times for unloading averaging 21 days, Argus said.
The traffic jams are partly the result of bargain buying in April when world prices plunged and futures of West Texas Intermediate (WTI) crude turned negative following the pandemic and a price war between Russia and Saudi Arabia.
Commercial and strategic factors have both contributed to the import surge. Refiners have been stocking up in anticipation of economic recovery, although commercial storage facilities have been reported to be nearly full for months.
"It's clear that even with record refinery processing, China has been storing large volumes of crude oil," Reuters reported on July 20.
That assumption has led analysts to conclude that China must also be filling its Strategic Petroleum Reserve (SPR), a secretive stockpile that could be called upon to meet the country's needs in case of transit disruption or other emergencies.
"The buying binge was a combination of opportunistic buying and storage," said Michal Meidan, director of the China Energy Program at the Oxford Institute for Energy Studies.
"Low oil prices are a good time to buy crude for the SPR and this was also actively encouraged by the government. But when crude is below U.S. $40 per barrel, domestic refiners have a guaranteed margin due to the domestic product pricing mechanism," Meidan said.
The government adjusts retail fuel prices to track swings in international oil costs over a 10-day period, but it suspends changes when crude prices fall below $40 per barrel, leaving refiners to pocket the difference.
Prices were below $40 per barrel for much of the six-month period, but the government raised retail fuel charges on June 29 and again on July 11 in keeping with the partial rebound of the international oil market.
The higher costs of domestic production from China's depleted oilfields have made lower-priced imports more attractive for Chinese buyers.
"Much of the buying was done by the independents, which were also given large volumes of crude import quotas, allowing them to hoard crude for both commercial reserves and daily operations," Meidan said.
With domestic oil output largely stagnant for over a decade, China has become increasingly dependent on imports to meet 73.4 percent of its needs, based on first-half figures.
In the first six months, China's oil production rose 1.7 percent from a year earlier to an average of 3.9 mbpd.
The government has been slow to address the import dependence vulnerability. But in May, the nation's top planning agency, the National Development and Reform Commission (NDRC), pledged to "ensure energy security" in its annual report to the National People's Congress.
The NDRC promised to "improve our contingency plans," without providing details. The general terms raised the possibility that the recent import surge may be aimed at increasing China's SPR cushion as a strategic defense rather than meeting immediate economic or refining needs.
Unlike the oil-consuming nations of the Paris-based International Energy Agency, China rarely divulges information about the volumes or activity in its SPR.
In an exception last September, an official of the National Energy Administration (NEA) said China had about 80 days' worth of import coverage in its stockpile, approaching the IEA standard of 90 days.
At the time, Reuters estimated the volume in China's SPR to be about 788 million barrels, but the calculation may have changed since then with the rise in daily imports.
The record-setting pace of oil imports also coincides with the intensification of conflicts with the United States on numerous fronts, suggesting that China may be importing more as part of its contingency planning or preparation for a disruption of supplies.
Tensions with U.S.
Since the NDRC delivered its work report on May 22, the list of disagreements with Washington has lengthened dramatically.
Disputes now range from the origin of the COVID-19 outbreak to mistreatment of Uyghurs in Xinjiang, the suppression of rights in Hong Kong, claims to the South China Sea, the banning of Huawei from mobile phone networks, allegations of spying, the shutdown of China's consulate in Houston and the closure of the U.S. consulate in Chengdu.
Prebuying and purely commercial considerations may account for the record imports at a time of low economic growth, but the rapid increases and the backlog suggest an urgency borne of strategic concerns.
"China has probably front-loaded much of its buying for the year as stocks are likely to be full soon, and demand is recovering but not enough to absorb the massive imports or even the strong refinery throughputs just yet," said Meidan.
"China has been preparing for a potential supply cut since the early 2000s, and the deteriorating ties with the U.S. have certainly raised concerns about energy security once more, so this is also a good time to stock up and try to reach the IEA's 90-day forward cover," she said.
Last week, the government showed signs of a parallel concern over vulnerability related to food production and imports as President Xi Jinping visited agricultural sites during an inspection tour of northeast China's Jilin province.
Xi's visit "shows that the country is firmly committed to ensuring grain security amid (the) COVID-19 pandemic and a complex international situation," said an official Xinhua news agency commentary, titled, "Bottom line of grain security must not be crossed."
"The rice bowl of the Chinese people, in any situation, must be firmly held in our own hands," Xi said.
Under the Phase 1 trade deal signed in January, China committed to buy $80 billion (561 billion yuan) of U.S. agricultural products over a two-year period.
On July 10, China booked its second-largest single-day purchase of U.S. corn in over 25 years, Reuters reported citing the U.S. Department of Agriculture (USDA).
China has been seeking to increase food supplies during the pandemic and has been taking advantage of cheap import prices, Bloomberg News reported..
In the first half of the year, China imported 3.66 million metric tons of corn, raising expectations that it will use up all of its annual quotas for low-tariff purchases of corn and wheat for the first time, Reuters said.