The cost of oil dipped so low during the COVID pandemic that some prices were negative. That meant distributors would have to pay someone to take barrels off of their hands.
China took advantage of these low prices to stock up. They bought so much foreign oil since March 2020 that a traffic jam of tankers is waiting at sea to offload.
At the end of June, over 73 million barrels of oil was floating at sea along the northern coast. Since May, the amount considered to be in floating storage has quadrupled, making it seven times higher than the monthly average from Q1 2020.
Is it smart to go bargain-hunting for oil when the markets are experiencing extreme stress?
China’s Purchases Propped Up the Oil Market
The swing in oil prices was about $80 during Q2 2020, going from negative $40 to positive $40 per barrel. That swing happened because of China’s strong demand while combined with supply cuts from Russia and OPEC.
China relies on foreign crude to meet its economic needs. When global prices reach record lows, it makes sense to stockpile oil for future use. That’s why imports surged almost 20% during the pandemic, with much of it coming from the Latin America region.
Most of the oil purchased at record lows came from Brazil. It takes about 45 days to ship crude from South America to China, which is why offshore storage levels are so high right now. Nigeria, Saudi Arabia, and Iraq also sent significant quantities.
China Wasn’t the Only Major Buyer
Any country that uses significant oil quantities for its economy found itself in an unexpected position to buy. Even if the costs weren’t budgeted, it made sense to start importing crude to meet future needs.
The United States supported domestic oil producers by purchasing 30 million barrels to reinforce the national reserve. Several countries in Europe and Asia made similar buys.
Weak prices caused two-handed purchasing, but not at the extent that China was operating.
Experts expect China to use the crude oil as an arbitrage opportunity. Investors are more willing to pay for the commodity in the future than they are today, which means those who store the product for a few months could sell it at a significant profit.
COVID continues to present unique energy and economic challenges for the world. China is betting big that oil prices will recover soon. If they don’t, they can still use the crude domestically, creating a win-win situation.