Soon after President Biden confirmed that the United States would be tapping into domestic inventories, December West Texas Intermediate (WTI) crude futures erased their losses and rallied 2.5 percent to nearly $79 a barrel. December RBOB gasoline futures also turned positive during the session, hitting an intraday high of a little more than $2.80.
Strategists note that investors had priced in the multilateral relief measure, confirming why WTI and Brent contracts had slipped as much as 5 percent over the last month.
Economists further purport that this will compound the problems weighing on the energy sector. By releasing oil from the SPR, the Biden administration could artificially lower prices. This would lead to a rise in demand and tightening inventories. Should prices slump, the downward trend would discourage greater crude exploration and output, contributing to deficits in global energy markets.
Moreover, since these strategic reserves need to be replenished, industry observers aver that there will be an uptick in demand at a later period, referring to the policy as a “swap.”
Is Relief Coming to Consumers?
Granholm described the president’s solution as a “bridge” to lower prices, conceding that there is not “going to be some dramatic difference.”“In December, the price will be about $3.19 a gallon and then in January it’s going to go down,” she noted.
For consumers, the White House decision’s effects may not bear fruit until the new year, Granholm prognosticated.
“In December, the price will be about $3.19 a gallon and then in January it’s going to go down,” she noted.
The measure may not even lead to any decline in gasoline prices. Or, if there is a drop, it might not be seen for a while since these types of tactics can take a while to travel through the system, strategists predict.
“For drivers wondering if gasoline prices will get lower as a result of the SPR release in the U.S., the reality is that this may not happen at all, or only with a significant lag time,” stated Bjornar Tonhaugen, Rystad Energy’s Head of Oil Markets.
“Firstly, the stock release, especially by the U.S. and possibly China, will be in crude barrels. For this to impact gasoline supplies, it must result in higher gasoline production from refineries which could only happen with a lag and in a case that margins improve while refiners expect gasoline demand to develop positively in the near term.”
The other factor is that refineries have already purchased their oil supplies for December.
The main issue, Blanch argued, was the “underinvestment problem” that coincides with escalating demand.
The War on OPEC?
The Organization of the Petroleum Exporting Countries and its allies, OPEC+, will be holding the monthly ministerial meeting on Dec. 2. This will be a much-anticipated meeting for global financial markets because officials could agree to slash production levels in retaliation to the latest developments.
OPEC+ delegates assert that the administration’s policy prescription is unreasonable and unjustified by current market conditions. This position, some say, could be a clue that it will ditch its plan to suspend production of 400,000 barrels of supply per day.
“OPEC thinks that the U.S. move is unjustified by the current market conditions—which is of course nothing but a bad faith, but the cartel will likely scrap its plans to pump 400,000 barrels of additional daily supply when it meets next Thursday,” said Ipek Ozkardeskaya, a senior analyst at Swiss Quote, in a note.
“Until then, we will probably see the oil traders’ heart pounding between larger strategic supply from the biggest oil consumers, and prospects of lower OPEC supply. Therefore, there is little chance we see oil breaking important price levels. On the downside, the $74 pb level should act like a solid support, while offers should come in play into the $80 psychological level.”
Over the next week, how OPEC responds could be “the million-dollar question,” says Tonhaugen. But Joseph McMonigle, secretary-general of the Riyadh-based International Energy Forum (IEF), believes OPEC+ energy ministers will keep their plans intact unless “external factors” force ministers to reassess the market.
“This planned release will only have a short-term impact on price but long-term ramifications for the global oil market,” Flynn explained. “This move will give more power to OPEC and Russia and will put U.S. producers at a competitive disadvantage. OPEC Plus can hold out longer than global strategic reserves and they know that they will eventually be paid to replace those reserves.”
On the geopolitical front, the situation could further strain relations between Washington and Riyadh, noted Helima Croft, the chief commodities strategist at RBC Capital Markets LLC. The White House has requested the cartel to raise production levels to curb prices in recent months, with the Energy Secretary accusing the group of refusing to support the global economic recovery. After being rebuffed by the organization, many strategists agree that the situation has turned political.
Whatever happens, Warren Patterson, the head of commodities strategy at ING, anticipates that the unfolding events could “leave the potential for further volatility in oil markets.”
