Why Is China Selling Off Its Oil Reserves?

China revealed plans on Thursday to start selling off more of its strategic oil reserves. For the world’s second-largest economy and second-biggest consumer of oil, this decision is a historic first.

Why China, which consumes 14% of the world's oil, would move in this direction has to do with the wider set of hiccups that are shaking its economy. In a statement, China’s State Bureau of Grain and Material Reserves explained its decision as a way to stabilize “domestic market supply and demand” and "ease the pressure of rising raw material prices for production companies."

Brent, the global benchmark for oil prices, fell 1.6%, while U.S. oil dropped 1.7% in response to the announcement out of Beijing. However, both recovered to $71.85 and $68.45 per barrel, respectively, by the end of Thursday.

It is unclear how much oil China holds in its strategic reserves, but CNN had reported that Beijing went on a bargain buying spree when oil prices were low in recent years. Estimates range from 37.7 million barrels to 73 million held at sea on Chinese ships in reserve.

The global production slowdown from COVID-19 is now easing into a resurgence in demand as economies recover, pushing consumer prices higher. Demand for energy at home has been strong enough to leave some communities without enough power.

This rise in costs of commodity prices has been singled out by Chinese authorities as another factor that could crimp economic growth, so sales from its stockpile to expand domestic supply should slow down the price increases.

China has not been spared from the same concerns about rising inflation that has gripped its peers. Back in June, China’s top economic planning agency urged all provincial-level authorities to regulate the commodity market, strengthen supervision and make every effort to ensure adequate supply and stable prices of important products. The more recent announcement of sales from the national stockpile may be a sign that these concerns have not abated despite attempts to bring prices under control.

On Thursday, China’s factory inflation struck a high point not seen since the 2008 financial crisis. According to Reuters, the producer price index in China has risen 9.5% from August 2020, beating an earlier expectation that it would rise by 9%. High commodity prices were considered a driving factor behind China’s inflation concerns.