China Engages in Discussions with Russia to Purchase Oil for Strategic Reserves, According to Bloomberg

China is working to replenish its strategic oil reserves by purchasing inexpensive crude from Russia, highlighting the strengthening of energy ties between Beijing and Moscow amid rising tensions surrounding the war in Ukraine.

Discussions between China and Russia are ongoing regarding additional oil supplies, according to sources familiar with the negotiations who requested anonymity due to the sensitive nature of the talks. This crude oil will be utilized to bolster China’s strategic petroleum reserves, with conversations primarily taking place at a governmental level, involving minimal participation from oil companies.

Since Russia’s invasion of Ukraine, oil prices have surged; however, prices for Russian crude have significantly declined as many buyers have distanced themselves to avoid reputational damage and potential financial sanctions. This situation has allowed China to take advantage of lower prices to enhance its extensive strategic reserves, which are typically drawn upon during crises or unexpected disruptions.

The foreign ministries of both countries did not respond immediately to inquiries for comments.

As of now, the specifics regarding the volume or terms of a possible agreement remain undecided, and there is no certainty an agreement will be finalized. The U.S. and U.K. have committed to banning Russian oil imports, and the European Union is considering similar actions. Nonetheless, crude from Russia continues to be exported to interested buyers such as China and India, who view the heavily discounted oil as a compelling opportunity. This trend aligns with China’s ongoing imports of crude from Iran and Venezuela.

Chinese refiners have been gradually acquiring Russian crude since the conflict began, even as a resurgence of COVID-19 has impacted consumption in the world’s largest crude importer. In fact, apparent oil demand in China fell by 6.7% year-on-year last month due to strict lockdowns. Although the outbreak has limited further increases in oil prices, the market has still risen over 40% this year.

China does not publicly reveal the scale of its oil inventories, but various companies use satellite data for estimates. Some analysts believe the country has the capacity to store over 1 billion barrels in combined commercial and strategic reserves. Recent third-party estimates suggest that stockpiles have increased partly due to the pandemic.

“There is still opportunity to replenish stocks, and if commercially viable terms can be secured, it would be a beneficial move for them,” stated a senior oil analyst.

Currently, overall stockpiles in China are estimated at 926.1 million barrels, an increase from 869 million barrels in mid-March, though still 6% lower than the record high seen in September 2020. For context, the U.S. Strategic Petroleum Reserve has a capacity of 714 million barrels and approximately holds about 538 million barrels.

Last year, China made headlines by selling crude from its strategic reserves to address surging oil prices as global economies emerged from the pandemic. This decision had minimal long-term impact, reducing stockpile levels and raising concerns about the necessity to restock at higher prices later.

Following these sales, the U.S. identified China, along with other major oil-consuming nations, as participants in a coordinated release of strategic reserves. It remains unclear whether China utilized its emergency stockpiles during this U.S.-led initiative.