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How Biden’s Huge Strategic Oil Release Could Backfire

  • President Biden’s huge SPR release announcement has pushed WTI prices back below $100.
  • SPR release may calm crude prices only in the short term.
  • U.S. SPR may need to be replenished at higher oil prices.

This week, the Biden administration revealed that it will release as much as 180 million barrels of crude oil in a bid to calm oil prices, which have remained above $100 per barrel for an extended period of time. The International Energy Agency, meanwhile, is coordinating a smaller but international reserve release of some 60 million barrels and has called an emergency meeting to discuss how exactly to go about it. 

It remains unclear whether part of the 180 SPR release in the United States will be a completely separate endeavor or if some of these barrels will be part of the IEA release. Earlier this year, the U.S. had agreed to release 30 million barrels as part of the IEA push. What is clear is that the success of these releases in calming down oil prices is quite unlikely.

The United States last year announced the release of 50 million barrels in an effort to bring down prices t the pump, which were eroding Americans’ purchasing power and weighing on the President’s approval ratings. 

This pressured prices for a few days before they rebounded, driven by continued discipline among U.S. producers, equal discipline in OPEC+, and a relentless increase in demand for the commodity.

Then Russia invaded Ukraine, and the U.S. banned imports of Russian crude and fuels. It also sanctioned the country’s financial system heavily, making paying for Russian crude and fuels too much of a headache for the dollar-based international industry. Prices soared again before retreating some, but remain firmly in three-digit territory.

Related: Why We Cannot Just “Unplug” Our Current Energy System

As of mid-March, the Department of Energy said, some 30 million barrels of crude from the strategic petroleum reserve had been sold or leased. That’s more than half of the 50 million barrels announced in November, and it appears to have had zero effect on price movements.

But the new reserve release is a lot bigger, so it should make a difference, shouldn’t it? It amounts to some 1 million bpd over several months, per reports about White House plans in this respect. Unfortunately, but importantly, oil’s fundamentals have not changed much since November.

U.S. shale oil producers, the companies that a few years ago prompted talk among analysts that OPEC was becoming increasingly irrelevant, have rearranged their priorities. They no longer strive for growth at all costs. Now they strive for happy shareholders.

This has given more opportunities to smaller independent drillers with no shareholders to keep happy. Yet these have also run into challenges, mainly in the form of insufficient funding because the energy transition has had banks worrying about their reputations and their own shareholders.

Pandemic-related supply disruptions have also affected the U.S. oil industry’s ability to expand output. Frac sand, cement, and equipment are among the things that have been reported to be in short supply in the shale patch. Now, there’s a shortage of steel tubing, too.

Meanwhile, OPEC is doing business as usual, sticking to its commitment to add some 400,000 bpd to oil markets every month until its combined output recovers to pre-pandemic levels. Just this week, the cartel approved another monthly addition of 432,000 bpd to its combined output despite increasingly desperate calls from the U.S. and the IEA for more barrels.

OPEC has been demonstrating increasingly bluntly that its interests and the interests of some of its biggest clients may not be in alignment right now. It has refused to openly condemn Russia for its actions in Ukraine and has not joined the Western sanction push. Related: U.S. Oil Demand Has Been Vastly Overestimated

On the contrary, OPEC is gladly doing business with Russia. And Saudi Arabia and the UAE, the two OPEC members that actually have the capacity to boost production beyond their quotas, have deemed it unwise to undermine their partnership with Russia by acquiescing to the West’s request for more oil.

In this environment, releasing whatever number of barrels from strategic reserves could only provide a very short relief at the pump. Then, it may make matters even worse. As one oil market commentator on Twitter said about the SPR release news, the White House will be selling these barrels at $100 and then may have to buy them at $150.

Indeed, one thing that tends to get overlooked during turbulent times is that the strategic petroleum reserve of any country needs to be replenished. It’s not called strategic for laughs. And a 180-million-barrel reserve release will be quite a draw on the U.S. SPR, which currently stands at over 580 million barrels. If oil’s fundamentals remain the same, prices will not be lower when the time to replenish the SPR comes.

This seems the most likely development. The EU, the UK, and the United States have stated sanctions against Russia will not be lifted even if Moscow strikes a peace deal with the Ukraine government. This means Russian oil will continue to be hard to come by for those dealing in dollars or euros.

According to the IEA, the shortfall could be 3 million barrels daily, to be felt this quarter. OPEC+ is not straying from its course. In some good news, at least, U.S. oil production rose last week for the first time in more than two months, by a modest 100,000 bpd.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on April 04 2022 said:
    When US President Biden announced in the last quarter of 2021 that he is releasing 50 million barrels of oil from the United States Strategic Petroleum Reserve (SPR), the global oil market and prices virtually ignored it. And when the International Energy Agency (IEA) announced in January this year a release of 60 million barrels from the OECD countries&#039; oil inventories, the global oil market was totally indifferent. Releasing more oil from the US SPR again isn’t going to fare better than previous releases in terms of impact on prices but may at least help slightly alleviate the tightness in the market.

    The Biden administration’s announcement that it is releasing 180 million barrels, the largest release in the 46-year history of the SPR, only equates to 1.8% of daily global consumption. Even with the release of another 60 million barrels by the IEA the combined total comes to 240 million barrels or 1.33 million barrels a day (mbd) if distributed over a 180-day period.

    In a tight global oil market at its most bullish state since 2014 and a robust global oil demand, adding 1.33 mbd will hardly impact prices and even if it does it will be short-lived possibly lasting few days.

    The Biden administration has neither any influence on the rising global oil prices nor on the gasoline prices in the United States. Rising domestic gasoline prices are being pushed upwards by global crude prices and also accelerating US inflation rate which has already hit 8.3%.

    The rocketing energy prices and rising inflationary pressure are feeding into the cost of manufacturing and food materials and reducing the purchasing power of ordinary Americans. This is a recipe for an approaching recession in the United States.

    And to complicate matters further, US shale oil is a spent force. Despite rising oil prices far above shale’s break-even prices, shale producers have failed to lift their production using the pretext of capital discipline. Their inability to raise production has much less to do with capital discipline and far more to do with the fact that the majority of the rich and sweet spots in the shale plays have been used forcing drillers to move towards the remaining less productive and costly spots. Moreover, shale’s well productivity has been declining steadily adding to production costs. The maximum shale oil could production could rise in 2022 is 200,000-300,000 barrels a day (b/d) over the 2021 claimed average of 11.0 mbd.

    OPEC+ has rejected repeated calls by President Biden and later by the UK and the European Union (EU) to lift production above the agreed volume of 400,000 b/d monthly because it strongly believes that the global oil market is still balanced. OPEC+ wants to keep whatever small spare capacity it has for use when the market becomes imbalanced.

    In this environment, releasing whatever number of barrels from strategic reserves could only provide a very short relief at the pump. These will eventually have to be replaced at a later date at higher prices.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • DoRight Deikins on April 04 2022 said:
    Who are President Biden's advisors? They do know there is a reason it is called 'strategic', don't they? The US, after release, will have 388 million barrels left.

    China is increasing its SPR supplies, while the US depletes theirs. Gotta wonder? Hard to sail most of the Pacific Fleet out of berth without oil.

    I have often thought that the US military would be overcome by their over-reliance on technology. Now it looks like it may be stupidity.

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