Oil prices – short term dent from release of US strategic reserves
US likely to announce release of oil from Strategic Petroleum Reserves today. According to latest press reports, President Biden will announce on Tuesday a plan to release oil from the Strategic Petroleum Reserve, in coordination with other countries. The Biden administration has also been pushing China, India, Japan and South Korea to join in a coordinated effort to release reserves of crude oil. The move seems to be timed ahead of the busy travel season in the US with Thanksgiving and Christmas round the corner, with a view towards political damage control.
Gasoline (petrol) prices have become a headache for Biden. High gas prices have always been a source of voter disgruntle in the US, and a majority of Americans are currently worried about rising inflation and gas prices, taking a toll on Biden’s popularity. US gas prices at the pump have climbed more than 50% y-o-y and has forced Biden’s hand in taking action to cool prices or face mounting political backlash. His efforts to convince the OPEC+ bloc to increase production at a faster rate have so far come to nought, as OPEC+ decided to keep to their schedule in their last meeting in early November. So, further desperate measures are on the anvil.
How much reserves can be released? The US SPR, set up in the aftermath of the Arab oil embargo in the 1970s is likely the world’s largest emergency supply of crude oil and stood at just over 600mmbbls as of early November (c.85% of authorised capacity of 714mmbbls), enough for about 30 days of domestic consumption and about 100 days of gross imports. However, the US President is constrained as to how much of the reserves can be released directly. Since there is no severe threat of energy supplies, only a limited direct drawdown of up to 30mmbbls can likely be ordered in this case. In the past, a few US Presidents have used the reserves as an emergency tool, the latest being President Obama in 2011, following supply disruptions in Libya. However, if the US goes down the SPR “swap” route, higher quantities of oil can potentially be released into the market (to be replaced later) over the next month or so.
The EU member countries are estimated to be sitting on a stockpile of 825mmbbls of oil but will likely not participate in a coordinated release. China is estimated to have 400-500mmbbls of strategic oil reserves and has in the recent past released some reserves (~7-8mmbbls) without causing too much of a ripple in the market. There are no indications whether China will join the US this time around. Japan and India are also reportedly working with the US to release some reserves, but suffice to say, most of the reserves release would come from the US front. If the global SPR release is around 50mmbbls in total, that would be half a day of global oil consumption and at high end estimates of 100mmbbls, that would be one day of global oil consumption. However, for import dynamics in December, this would be a big blow as it could displace a few days of import demand.
How will OPEC+ react? OPEC+ sources have stated that the release of strategic petroleum reserves is not in line with market conditions and given the pace of easing of OPEC+ supplies over the next few months, the market should be well balanced or in surplus by early next year in any case. Thus, OPEC+ members may consider responding to the US move in kind at their next meeting in early December, by potentially ramping up production more slowly than originally planned, in an attempt to shore up oil prices, and continue benefitting from the current boom (given that US shale response to high oil prices has been tepid so far in terms of volume growth).
Overall impact – short term dent, but does not change future fundamentals significantly. Oil prices have already corrected by around 5-6% to below US$80/bbl in recent days on account of the COVID surge in Europe and talks of the US SPR release, and if the SPR release quantum is materially higher than expected, oil prices could see further downside to levels of ~US$75/bbl in the near term. However, this is not a sustainable way to balance the market, and the move could actually benefit oil demand next year as strategic reserves need to be replenished. Thus, there is no change to our bullish views for oil in 2022/23.