Brent oil surged as China planned to start buying up cheap crude for its strategic reserves, while U.S. President Donald Trump said he thought Saudi Arabia and Russia would resolve their differences in the oil price war that has added to the market’s malaise.
Futures rose as much as 13% in London as Beijing instructed government agencies to start filling state stockpiles after oil plunged 66% over the first three months of the year, while the global benchmark’s nearest timespread also rallied strongly. President Trump painted a more optimistic tone in the price war between Saudi Arabia and Russia, saying he thought the two would work out the differences. Despite that, Saudi Arabia has been ramping up output to record levels in recent days.
China’s move comes as the physical crude market shows deepening signs of strain as supply explodes and demand collapses due to the coronavirus. Dated Brent, the benchmark for two-thirds of the world’s physical supply, was assessed at $15.135 on Wednesday, the lowest since at least 1999. Crude has slipped below $10 in some areas including Canada and shale regions in the U.S., Belarus wants to buy Russian oil for $4, while some grades have posted negative prices.
“News that China will take advantage of lower prices to add to reserves has clearly provided a boost to the market,” said Warren Patterson, head of commodities strategy at ING Bank NV. “But given the extremely bearish outlook for the market it is difficult to believe that this strength is sustainable.”
President Trump said he expects the situation with Saudi and Russia will be resolved. He also said he’s planning to meet with independent oil producers in addition to the majors. “They’re negotiating, they’re talking, and I think they’ll come up with something,” Trump said. “I do believe there’s a way that that can be solved or pretty well solved.”
In addition to state-owned reserves, Beijing may use commercial space for storage, while also encouraging companies to fill their own tanks, according to people with knowledge of the matter. The initial target is to hold government stockpiles equivalent to 90 days of net imports, which could eventually be expanded to as much as 180 days when including commercial reserves.
China’s buying spree would come as concerns grow that oil storage tanks globally will soon be full. In the U.S. stockpiles grew by the most since 2017 on Wednesday, while consultants from IHS to FGE have said that world inventories may be full within weeks.