Louise Dickson, Senior Oil Markets Analyst, Rystad Energy Consultants
Today marks an official emergence of an ‘anti-OPEC+’, a group of top oil-consuming countries that are taking the supply-side dynamics into their own hands in the unconventional and unprecedented release of strategic petroleum reserves to create artificial looseness in the oil market and deliver a negative blow to oil prices.
The orchestrated supply-side via SPRs is a last ditch effort after the US was unsuccessful an influencing OPEC+ to release supply, an ongoing call since August. T
he supply side support is intended to quell oil prices and keep pandemic GDP recovery on track, especially amid the backdrop of an increasingly inflationary macro environment.
The coordinated effort is by the US, which has pledged 50 million barrels of supply, and joined by other major consumers China, India, Japan, Korea, and the UK.
The White House didn’t provide a chartered schedule for the release, but some of the barrels will be hitting the market as early as December. Much of the downward price impact has already been priced into the futures curve over the past week since China announced it was ready to cooperate following the Xi-Biden summit.
The sale of the reserves should more be viewed as ‘swap’, as these strategic reserves will need to be replenished at some point, meaning a demand uptick in the future. However, with a flatter price structure ahead, these countries will have the arbitrage advantage of restocking reserves at a price band much lower than $80 per barrel Brent.
Today’s historic but very unorthodox move is a clear message to OPEC+ that it’s not the only actor on the global oil market stage. The coordinated effort represents the formation of an unofficial demand-side alliance that keeps OPEC+ in check if it fires up prices to a level seen as unsatisfactory to spur economic growth and keep consumer purchasing power in check.
The threat of more supply in the short-term certainly creates an artificially looser oil market for the next 1-2 month period. However, the move by Biden and other leaders may just be pushing the supply issue down the timeline, as emptying out storage will put even further strain on already low oil stockpiles, and as these countries will eventually have to go on a buying spree to refill the strategic reserves.
The White House announcement referenced a release of ‘barrels of oil’ so for now we assume this refers to crude stocks, and not any refined products such as gasoline or diesel. While the majority of US reserves are held in crude stockpiles, the participating Asian economies may decide to tap into more gasoline and diesel stocks, which would provide more immediate relief to the products market, to the consumer pain and to the inflated pump prices.
In the US, especially with the traditionally high demand during the Thanksgiving holiday that is coming up, it is unlikely the price relief will be passed down to consumers in the near short-term, unless the Biden administration prioritizes the release of gasoline stocks.
The tug of war between producers for higher prices and consumers for lower prices can only lead to a very volatile price environment in 2022.