President Biden’s threat to oil producers that he would force prices down has already backfired. Oil markets were unimpressed by the U.S. administration’s plan to coordinate a strategic petroleum reserve release from major importers in an effort to increase supply. While some observers believe an SPR release could push oil prices down, most analysts have warned that it will only have a temporary effect and could eventually trigger a price spike. OPEC+ members have not even engaged with Biden’s strategy as they saw it as flawed from the start. The release of 50 million barrels of crude from the US SPR was never going to significantly impact oil prices. U.S. analysts are now worried that Biden’s actions could end up with higher oil prices.
Biden’s plan first garnered support from other OECD countries, such as Japan, South Korea, and the United Kingdom, before it was rumored that China and India would also release oil from their reserves. To really push a market down, however, a clear and potentially price-threatening oversupply would have to be on the horizon. At present, there is no such threat, with OPEC reporting a potential but small oversupply in 2022. The total commitment of all SPR releases under Biden’s plan was expected to be around 100 million barrels, which is roughly one day of global production. Realistically, that release would take place over several weeks, making for an additional daily volume of 4-5 million bpd. Given how unimpressed markets were with Biden’s initial release, it is starting to look like this strategy will end up being bullish for oil markets in the long term. Biden’s plan appears to have taken market fundamentals into account but failed to understand the real impact and production capabilities of OPEC+ at present. While Saudi Arabia and the UAE hold some spare production capacity, other OPEC producers and non-OPEC members are struggling to even produce their agreed-upon volumes. It remains unclear what OPEC’s reaction to Washington’s strategy will be, but rumors have already begun to circulate. It is possible that Saudi Arabian, UAE, and Russian oil strategists will decide not to increase production volumes or they may simply stick to the plan for the coming months. The impact of the SPR release already appears to be waning, with oil prices already trending upwards again. At the same time, despite new covid cases across Europe, the overall demand for crude oil is still expected to increase. The ongoing energy crunch in Europe and China will only add to the demand for crude oil. Russia’s unwillingness or lack of capacity to deliver gas to Europe and possibly China will do the rest. Winter is coming, temperatures are going down, even earlier than expected, so another gas storage volume hit is already underway.
The desire to quell global oil and gasoline prices is only growing in the U.S. and China, but OPEC+ is not to blame. One of the main drivers at present for higher gasoline and consumer prices is the quantitative easing (QE) policies being used to reduce the global damage from covid. If Western and Asian leaders really want to do something about crude oil prices, they should remove QE and cheap money from markets. A lack of cash or financial reserves will push down demand for crude oil within weeks or several months. Blaming OPEC for high prices is like blaming Santa Claus for price inflation of consumer goods during the Christmas Season. Santa is not increasing prices, it is the demand of consumers. Governments have added trillions of dollars to the market for infrastructure projects, energy-transition GIGA projects, or real estate booms. Cash availability is driving the market for crude oil. Economic growth needs energy, it is a simple fact of life. Biden and his advisors should first and foremost look at their own domestic markets and crude oil and gas producers. By restricting domestic producers and supporting large-scale hydrocarbon exports while importing Russian, Saudi, and other crudes, Biden is failing to address the core issues behind high gasoline prices. OPEC and other oil producers are not behind the current bullish market sentiment, it has been caused by QE, a lack of investment, and ineffective policies.
It will be very interesting to see what OPEC leaders decide when they meet in Vienna. The remarks of OPEC leader Barkindo, Saudi energy minister Prince Abdulaziz bin Salman, and the UAE’s minister Al Mazrouei are unlikely to be diplomatic. They believe they are being blamed for something that Biden and others are responsible for. In the mid- and long-term, Biden’s decision will almost certainly backfire. The SPR release could provide temporary relief to oil markets, but that oil will have to be replenished at some point - and most probably at a higher cost which governments will pass on to consumers and industry.
By Cyril Widdershoven for Oilprice.com
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