Oil stockpiling as a strategic issue

With increases in oil market price uncertainty, government policies and company behavior adapts to the environment. One important change in behavior is increased hoarding or stockpiling of oil. If there is a fear of stock-outs, then you will hold more in inventory. Additionally, if interest rates are low, the cost of stockpiling is less.  There is no penalty of being wrong, except for price moves, if rates are low. There is a classic precautionary motive for holding an asset. This hoarding done on an international scale will also lead to a tightening of the oil market.

China is supposed to be adding to their stockpile at between 250,00-500,000 b/d. They have added 100 mmb in reserve through 2009 in phase 1 of a build-up. There is supposed to be another 170 mmb build by 2013 and further inventory goals in the future. The exact amounts are state secrets.

We will see companies add to their stockpiles. This will keep prices firm in the oil market. Obviously, if there is an economic slowdown or less global tensions, demand will slow and inventory build will increase faster and there will be less precautionary motive.  Nevertheless, strategic hoarding is rational and normal for governments and companies.