Biden's Battle To Bring Oil Prices Down

This week’s noteworthy elements include more than just the slow sapping of the U.S. Strategic Petroleum Reserves, which have fallen to 416 million barrels - levels not seen since July 1984 when U.S. crude oil demand was less than 16 million barrels per day. OPEC+ took center stage this week, both before, during, and after its Wednesday meeting. The full OPEC+ group decided on Wednesday to cut its production targets for November by 2 million bpd - a move that would result in a real production cut of just over a million barrels per day, factoring in those countries that are already producing below the newly dropped quotas. 

OPEC+’s move was criticized heavily around the world - with the most vehemence coming from major oil importers as well as the United States, along with media who pleaded the case for energy-troubled Europe. OPEC+ didn’t even attempt to silence the rumors leading up to the meeting that it was planning on cutting production. This sent the Biden Administration scurrying to alter the outcome of the meeting before it started. Nevertheless, OPEC+, at the prodding of both Saudi Arabia and Russia, decided to cut more production than most thought possible prior to this week. 

To hear OPEC+ tell it, the group cut production due to market uncertainties, namely a global recession that could weigh on oil demand. Media has portrayed the cuts as a defense of a particular price, which some analysts have pegged around $90 per barrel. The Biden Administration must now decide what card to play next. Will the United States move to keep Brent under $90 (or more aptly, gasoline near $3) by releasing more barrels from the SPR? If so, will OPEC+ move to cut even more production? The United States is considering other moves as well, including a refined product export ban, or a curb on refined product exports. It could also move to revive the NOPEC bill, pressuring - and alienating - many of the Gulf countries. It could also lighten up oil sanctions on Venezuela, but it must be remembered that as an OPEC member, this would give the group even more clout.

Alas, keeping a lid on retail gasoline prices in the United States is no small task in an essentially free market. The refinery limitations and length of time it would take to build out new refining capacity are compounded by the now dwindling SPR, the Jones Act, Europe’s ravenous thirst for all things energy, the destruction of the Nordstream pipelines, lack of progress with the Iranian nuclear deal, and the political theater played out daily for the unsuspecting masses.

The only shoe left to drop at this point is China’s lifting of Covid restrictions. 

OPEC+, on the other hand, has scored a great victory. Not only did the group come away again after flexing its muscles on its oil market prowess, but it has also managed to gain back additional spare capacity that can be utilized as the need arises.