The decision by OPEC+ to essentially let Brent crude rise above $80 per barrel, a four-year high, was met with outrage by U.S. President Trump. At the UN General Assembly, he denounced OPEC.
“OPEC and OPEC nations, are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it. We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good,” Trump said. “We want them to stop raising prices, we want them to start lowering prices, and they must contribute substantially to military protection from now on. We are not going to put up with it — these horrible prices — much longer.”
It is unclear what he meant by that last sentence. He would seem to either being threatening some retaliation against OPEC members for not increasing production, or perhaps he was threatening to do something to try to lower oil prices. There is little the U.S. government can do to promote even faster domestic production as production decisions are made at the company level.
The only thing the Trump administration can do is to release oil from the strategic petroleum reserve (SPR). The rebuff by OPEC+ to Trump led to some analysts to expect a release from the SPR, particularly since mid-term elections are quickly approaching and voters are experiencing retail gasoline prices close to multi-year highs. Average retail gasoline prices nationwide rose to $2.844 per gallon for the week ending on September 24, according to the EIA.
“If OPEC does not wish to jeopardise its independence, it will hardly be able to respond to Trump’s latest remarks by raising output,” Commerzbank wrote in a note. “So Trump’s only real option is to release strategic reserves in order to drive prices down ahead of the congressional elections.” Related: Traders Turn Bullish Ahead Of Iran Sanctions
“There’s a strong possibility of another strategic reserve release,’’ said Antoine Halff, head of the global oil market program at Columbia University’s Center on Global Energy Policy, according to Bloomberg. “It’s a wild card that justifies close attention for the next few weeks.” Bloomberg also reported that oil-trading industry executives “openly speculated about when Trump might tap the reserve” at the annual Asia Pacific Petroleum Conference (APPEC) in Singapore this week.
However, U.S. Secretary of Energy Rick Perry dismissed these rumors. He told reporters that any sale would have a “fairly minor and short-term impact,” and he trusted that the oil market would be fine as OPEC and Russia would fill any potential gap.
He’s right on the first point: Even if the U.S. moved to sell more oil from the SPR, it would only have a limited and temporary impact. Citi’s Ed Morse said it could lower prices by a few dollars per barrel. But oil traders would know that any sale is temporary. Mike Muller, an executive at Vitol Group, told Bloomberg that the market may even interpret a release as a bullish sign since it would reduce the supply cushion that major producers could call upon for future outages.
In any event, the use of the SPR as a political tool may not be all that effective because it’s probably too late. There is a lag between changes in global crude oil prices and the price of gasoline at the pump, so even if an SPR release were to occur tomorrow, motorists likely wouldn’t see the effect until after the mid-term elections. Related: OPEC's No.4 Vows To Boost Spare Oil Capacity
Still, the political cost of unloading oil from the SPR is not what it once was. It used to be the case that the U.S. government was extremely protective over the SPR and very cautious about dipping into it. However, the shale revolution has created the semblance (or illusion) of abundance, and the U.S. Congress has already begun legislating sales of the SPR for budgetary reasons. Top U.S. policymakers have all but given up on the massive SPR as a tool for energy policy and energy security. The Congress has already legislated sales of oil from the SPR, spread out over the next decade. The upcoming sale of 11 million barrels in October and November is part of that.
In other words, there is no longer a political cost for the Trump administration if it were to decide to take an aggressive route and sell large volumes of oil from the SPR, above what is already scheduled.
For now, Sec. Perry insists that is not in the cards. And because Iranian supply will continue to fall in the weeks and months ahead, oil could be heading higher. “As a result, the talk is now Brent reaching $100 a barrel in the not-so-distant future,” said Tamas Varga, analyst at brokerage PVM Oil Associates, according to the Wall Street Journal.
By Nick Cunningham of Oilprice.com
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