Five major oil-consuming nations joined together to make a surprising move to push down oil prices. So far, it isn’t working.
Oil prices rose by 3.3% in morning trading Tuesday after the news that the US, China, India, Japan, and the UK had agreed to a plan that could move more than 55 million barrels of oil in their strategic oil reserves onto the market, according to Reuters.
This represents an escalation of a war of words led by US President Joe Biden, who has been calling for the-oil exporting countries in OPEC+ to push up their production further to address tight supplies.
While the initial market response was a small win for OPEC+, this marks the start of what Rystad described as a slow-moving “supply poker game.”
“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,” Rystad said.
It described the coordinated effort as “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.”
OPEC+ has a chance to respond next week when it meets for its monthly monitoring meeting where it can alter its plan to gradually increase its exports by 400,000 B/D.
After the plan was reported, the UAE energy minister said he had received calls from other ministers saying the group needed to respond. He suggested the group ignore the action, as it had done in response to previous calls by Biden to raise its output.
“I don’t think we are changing the plan,” Suhail al-Mazrouei said , according to news stories. “As of now, we are going to meet on the 2nd. We will look at the facts, we will look at the volumes in the market, and we will take the decision faced on those facts.”
One of those facts, according to a Reuters story, is that the group may not be able to increase its production anytime soon. It produced 700,000 B/D less than planned in September and October, according to the International Energy Agency.
Another fact is the market picture is not going to be affected by withdrawals from reserves before 2 December because pulling oil out of a government-run petroleum reserve is a slow-moving process.
Still, if the US withdraws 50 million bbl from the US Strategic Petroleum Reserve (SPR), it could lower the price of oil for a couple months. Particularly since it would be hitting the market early next year, at a time when the US Energy Information Administration and others have been predicting lower oil prices due to a modest increase in global oil supplies.
OPEC may find it is easier to wait out any price drop that causes than making the deep cuts needed to negate its impact.
“OPEC+ has little interest and incentive to retaliate against this move. It will be very difficult to find a consensus to ‘punish’ their most important customers and political allies,” said Roger Diwan, a vice president for IHS Markit, in a tweet in which the oil analyst shared his personal analysis.
Also, this is rare case where the US and China are allied on an issue. Last week’s news that China had agreed to cooperate with the US on oil prices knocked down the price of Brent crude from $81.24 Thursday to $78.89 Friday.
“The inclusion of China is significant and does provide a political cover to the US action. China did build large stocks during the COVID crisis and it was always perceived that it could be used commercially and act as a brake to price momentum if needed,” Diwan said.
Any victory is not likely to be long lasing. Pulling oil out of strategic reserves “is a bridge, not a long-term solution” to the problem of tight oil supplies, Diwan said.
It is too early to declare a victor. If this were a poker game, it would be one where wary pros fold hand after hand, sizing up the opposition and looking for an opportunity.
The plan, which could move 50 million barrels in the US SPR onto the market, requires a slow-moving bidding process that Rystad said could put some barrels on the market in December.
The rate of US withdrawals will depend on the pace of the government bidding process, and the rate at which the oil can be pumped out of the SPR’s storage caverns along the Gulf Coast to refiners.
The record weekly rate for withdrawals from the US SPR was 6 million bbl on two occasions this century, Rystad said.
Refiners are not short of crude at the moment. The big platforms shut down by Hurricane Ida are back online. Their interest will likely depend on whether the barrels from the SPR look like a good deal, which will depend on their price expectations. The US program will be based on swaps—barrels borrowed now must be returned in the future, plus interest.
If prices fall from current levels, those borrowed barrels could look like a good deal. But if prices are higher when that loan comes due, refiners will pay more than they would have otherwise.
One factor they will need to consider is that anyone taking oil from a government reserve now will need to buy oil to close out that swap, which will increase oil demand—and possibly prices—at a time when big consuming countries will be buying oil to refill their reserves.
Another group paying close attention to prices are drivers irked by higher gasoline prices, which is one of the reasons cited for Biden’s falling popularity.
Rystad advised motorists to not get their hopes up for lower fuel prices: “This may not happen at all, or only with a significant lag time.”
