This week, the Biden administration announced that will be the case release up to 180 million barrels of crude oil to calm oil prices, which have stayed above $100 a barrel for an extended period. The International Energy Agency, meanwhile, is coordinating a smaller but international reserve release of about 60 million barrels and has called an emergency meeting to discuss exactly how to proceed.
Remains not clear whether some of the release of 180 SPR in the United States will be an entirely separate endeavor or whether some of these barrels will be part of the IEA release. Earlier this year, the US had I Agree Release 30 million barrels as part of IEA push. What is clear is that the success of these releases in calming oil prices is quite unlikely.
The United States last year announced releasing 50 million barrels to pump prices down, eroding Americans’ purchasing power and hurting the president’s approval ratings.
This put pressure on me Prices for a few days before rebounding, fueled by continued discipline from US producers, the same discipline from OPEC+ and a relentless increase in demand for the commodity.
Then Russia invaded Ukraine and the US banned the import of Russian crude oil and fuel. It has also heavily sanctioned the country’s financial system, making paying for Russian crude and fuel too much of a headache for the dollar-based international industry. Prices rose again before retreating somewhat but remain firmly in the triple digits.
By mid-March, the Department of Energy said around 30 million barrels of crude oil had been sold or leased from the strategic oil reserve. That’s more than half of the 50 million barrels announced in November and it doesn’t appear to have impacted price action.
But the new reserve release is a lot bigger, so it should make a difference, right? According to reports of White House plans in this regard, it amounts to about 1 million bpd over several months. Unfortunately, but importantly, oil fundamentals haven’t changed much since November.
US shale oil producers, the companies that sparked talks among analysts a few years ago about OPEC becoming increasingly irrelevant, have rearranged their priorities. They no longer strive for growth at any cost. Now they strive for happy shareholders.
That gave more occasions to smaller independent drilling companies with no shareholders who make it happy. But even these have encountered challenges, primarily in the form of insufficient financing, because the banks fear for their reputation and their own shareholders in the course of the energy transition.
Pandemic-related supply disruptions have also impacted the US oil industry’s ability to expand production. Frac sand, cement and equipment are among the items reported to be in short supply in the shale field. Well there is defect also made of tubular steel.
Meanwhile, OPEC is doing business as usual, sticking to its commitment to add about 400,000 bpd to oil markets each month until their combined production recovers to pre-pandemic levels. Just this week the cartel authorized another monthly gain of 432,000 barrels per day to its combined production despite increasingly desperate US and IEA calls for more barrels.
OPEC has demonstrated increasingly bluntly that its interests and the interests of some of its largest customers may not be aligned at this time. It has refused to openly condemn Russia for its actions in Ukraine and has not joined the Western sanctions push. See Also: US Oil Demand Was Grossly Overestimated
On the contrary, OPEC likes doing business with Russia. And Saudi Arabia and the United Arab Emirates, the two OPEC members that do have the capacity to boost production beyond their quotas, think it unwise to undermine their partnership with Russia by giving in to Western demands for more yield oil.
In this environment, the release of any number of kegs from strategic reserves could provide only a very brief relief at the pump. Then it can make things worse. As one oil market commentator said on Twitter over the SPR release news, the White House will sell those barrels at $100 and then potentially have to buy them at $150.
Indeed, in turbulent times, the fact that every country’s strategic oil reserves need to be replenished is often overlooked. It’s not called strategic for a laugh. And a 180 million barrel reserve release will be quite a drag on the US SPR, which is currently over 580 million barrels. If oil fundamentals remain the same, prices will not be lower when the time comes to fill the SPR.
This seems the most likely development. The EU, the UK and the US have said sanctions against Russia will not be lifted even if Moscow strikes a peace deal with the Ukrainian government. That means Russian oil will continue to be hard to come by for those who trade dollars or euros.
Accordingly the IEA, the deficit could be 3 million barrels per day, which will be felt in this quarter. OPEC+ is not deviating from its course. In some good newsat least US oil production rose a modest 100,000 bpd last week for the first time in more than two months.
By Irina Slav for Oilprice.com
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