Global oil price collapse a historic opportunity for China to ‘bottom out’ energy assets: analysts
Published: Apr 21, 2020 11:43 AM

An oil production facility of Sinopec, China's largest oil refiner, based in Taizhou, East China's Jiangsu Province, fully resumed drilling and well repair work on Sunday. The facility's daily output is more than 1,200 tons. Photo: cnsphotos

China's crude oil futures edged down 3 percent on Tuesday's opening, following an overnight slide from a major US oil benchmark into unprecedented negative territory. Analysts say the historic drop in oil prices offers China, a major source of oil imports, a good opportunity to "bottom out" certain oil assets and scale up strategic reserves.

As of 11:08 am on Tuesday morning, China's crude oil futures are being traded at 236.2 yuan ($33.4) per barrel, down 4.5 percent from Monday. On Monday, a barrel of West Texas Intermediate crude oil dropped to -$37.63 - something that has not happened since oil futures began trading in 1983. The benchmark future at one point touched a record-breaking low of -$40.32 a barrel. 

 "It is also a good news for factories across China that are on the way to resuming operations. It will cut our energy costs significantly," Jin Lei, an associate professor at the Beijing-based China University of Petroleum, told the Global Times on Tuesday. 

Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, pointed out that such a window will be relatively short and the world is now faced with the same problem: full warehouses.

"The collapse this time is related to sluggish demand caused by the COVID-19 pandemic. Once that is brought under control, the oil price will recover, but it will be hard to return to the previous level of $40 per barrel," said Lin.

Analysts noted that as China has set a "floor price" for oil at $40 per barrel, consumers may not be able to reap many benefits from the global price meltdown.  

In March, the National Development and Reform Commission, China's economic planner, cut retail ceiling prices for gasoline by 1,015 yuan per ton and diesel by 975 yuan, the biggest reductions since China launched its pricing mechanism in 2013.

On the downside, the oil price slump will exacerbate the financial woes that imperil major oil producers, including the "big three oils," observers said.    

"This is a big strike to domestic oil prices. The cost of producing [in China] is much higher than purchasing from abroad. Producing a barrel of oil does not bring any profit at the current stage. It only incurs massive losses," Jin explained. 

Lin noted that the oil price slump will affect Chinese oil giant PetroChina more than the two other stated-owned oil players Sinopec and CNOOC, as it is upstream of the industrial chain.

Peng Huagang, an official from the State-owned Assets Supervision and Administration Commission of the State Council, said at a press briefing on Monday that the plummeting global oil price has squeezed the profits of some centrally administrated state-owned enterprises to a great extent, thus China's oil companies all saw losses in the first quarter.

"Demand at home dwindled in the first quarter, which dragged down sales of petroleum products by 20 percent. The costs of oil exploration and refining also surpassed revenues, which resulted in across-the-board losses," Peng explained. 

In the first quarter, China's crude oil imports were up 5 percent to 130 million tons, customs data showed.