A clear winner has emerged from the historic rout in global oil (CL=F) markets: China, which is reaping an unlikely reward from a crisis it helped foment.

Crude remains trapped in a downdraft of oversupply and the demand shock created by the COVID-19 crisis, with Wall Street roiled for a second consecutive day by sinking oil prices. Weak demand has oil storages filled to near capacity, a condition that’s unlikely to abate as restrictive lockdowns keep businesses closed and citizens mostly indoors. 

Yet in a brutal twist of irony, the world’s second-largest economy — where the coronavirus first originated — has become the immediate beneficiary of a catastrophic decline in global demand that’s sent oil prices into a swan dive. On Monday West Texas Intermediate, or U.S. crude, saw its price turn negative for the first time ever, a sign that there’s way more oil than places to store it. 

“The biggest winner is China since it is the world’s largest energy importer,” noted research firm Jefferies on Tuesday. “A rough rule of thumb is that a 0.5% drop in oil imports to [gross domestic product] is equivalent to a rise in 0.25% in output.”

Still, Jefferies warned that “second-round effects” will pressure oil-producing countries in the Middle East as well as the United States. On Tuesday, President Donald Trump vowed to backstop domestic producers sandbagged by crude’s drop. 

‘Huge miscalculation’

Evidence suggests that China has already been taking advantage of low oil prices for months, by amassing inventory for its strategic and commercial stockpiles. Last year, the country’s annual oil imports jumped by an average of over 10 million barrels per day, up from 900,000 from its 2018 average, according to the Energy Information Administration. 

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“China’s new refinery capacity and strategic inventory stockpiling, combined with flat domestic oil production, were the major factors contributing to the increase in China’s crude oil imports in 2019,” the EIA noted recently.

And despite an ostensible truce between Saudi Arabia and Russia that was brokered by the U.S. and meant to end a price war, the collapse in crude prices has been nothing short of stunning – even in a market whipsawed by a worldwide pathogen outbreak.

“The shocking drop in WTI is a result of a huge miscalculation by Saudi Arabia and OPEC+,” Jefferies said. “Engaging in a price war when demand is evaporating due to the COVID-19 was ill-advised, to say the least.”

Yet even China might not be completely immune from the ravages of sinking global demand, and limited storage capacity. According to data cited by Eurasia Group, China’s oil inventories checked in at 31.5 million tons, or 65% of total commercial reserve capacity.

“This is close to the 70% storage utilization red line which is normally regarded as full storage capacity,” Eurasia said, noting that Beijing’s stockpiling of already cheap crude may start catching up to it.

“Additional stockpiling capacity has been limited by a steep buildup of crude owing to refining activity disruptions from the coronavirus outbreak before the oil crisis,” the firm said, noting that full capacity has forced the country to “divert cargoes elsewhere.”

Meanwhile, China’s crude imports surged by nearly 5% year-on-year in March, and will likely continue to rise “as previously ordered low-priced oil cargoes gradually arrive. With domestic fuel consumption below pre-crisis levels, higher inventories are expected.”

Javier David is an editor for Yahoo Finance. Follow him on Twitter: @TeflonGeek

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