As the oil market moves closer to a long-anticipated glut, traders are closely watching buying from China to see if it will absorb an excess that the world’s crude producing nations are set to pump.Earlier this year, China piled into the crude market to snap up millions of barrels, including some that went into its strategic storage. The buildup has since slowed down as the nation’s domestic demand picked up, but with expectations that Beijing will continue to amass barrels, its next steps are seen as critical.With China’s vast network of oil tank farms still a little over 50% full, according to OilX data, traders say another spree would limit the damage from a long-anticipated glut in other parts of the globe. That’s significant because if China’s buying is elevated, it will prevent a buildup of supply in a narrow set of hubs in Midwestern America and Northwest Europe, limiting how far prices can fall.“The key question is where stockbuilds will turn up,” HSBC Holdings Plc analysts including Kim Fustier wrote this week. “If China continues to absorb excess oil volumes via its strategic reserves, as it did in in the second quarter, stockbuilds in the OECD could be muted.”The global market’s capacity to absorb barrels will be among talking points when OPEC+ nations meet to discuss supply on Sunday. Saudi Arabia wants the group to accelerate the return of another tranche of halted output adding to concerns about a surplus that would depress prices but all options are on the table.About 10% of the nation’s crude stockpiling has been directed to its strategic petroleum reserves, according to Kayrros analyst Antoine Halff. There have also been additions to the country’s refining capacity, such as CNOOC Ltd’s Daxie plant, and the addition of new tank space.It’s also possible that Beijing wants to hold more barrels in storage given the heightened levels of geopolitical risks over the last few years, the Oxford Institute for Energy Studies wrote in a note.While China’s flagship crude futures contract was flashing a softer market over recent weeks, the world’s two main benchmark’s continued to suggest relatively tight supplies.That’s because inventory builds so far this year have avoided western hubs. In Cushing, Oklahoma, the tank farm of about 15 storage terminals that underpins the West Texas Intermediate futures contract, inventories have been repeatedly near multi-year seasonal lows this year.The International Energy Agency says that in the second quarter global oil stockpiles increased by the most since the third three months of 2020, when the global economy was still being ravaged by the Covid-19 pandemic. Over that period, stockpiles in the developed world climbed by 60,000 barrels a day, while expanding by more than 1mn barrels a day everywhere else.It’s still possible that prices will need to fall from current levels for China buy in a big way, though, according to Frederic Lasserre, head of research at Gunvor Group.“The last solver that everybody is talking about is China,” he said. “Not for runs, but because we’ve seen a recent trend of them being willing to build up crude barrels. But if you expect China to go back to stockpiling 1mn barrels a day, you need a big price drop to incentivise it.”Both inside and outside of China there’s plenty of space to store unwanted oil.Bank of America Corp wrote last month that there’s about a billion barrels of empty tank capacity available across the globe to fill with inventories, which could mean that markets avoid falling into a heavily bearish structure.There are signs that the surge in production is starting to come, though. Brazil’s output approached 4mn barrels a day for the first time over the summer, and a new field is due to start in the country before the end of the year. Guyana has moved from producing nothing to almost 1mn barrels a day and output in Canada’s oil heartland of Alberta hit a record in July.At the same time, despite concerns about a decline in US output, the Energy Information Administration has consistently revised oil supply estimates higher over the last few months.What traders are waiting for now, is for those increases to appear at key storage hubs.“When we look at OECD inventories we’re still at a relatively low level,” Nadia Martin Wiggen, a director at Svelland Capital, said in a Bloomberg TV interview. “Yes, there is this supply glut coming according to expectations, but we need to see that materialising.”
