The Fuse

Biden Taps SPR, But Remains at the Mercy of OPEC+

by Nick Cunningham | November 29, 2021

The U.S. government announced that it would release oil from the strategic petroleum reserve in coordination with a handful of other countries in an effort to tame oil prices.

The White House had signaled the move ahead of time, which ultimately meant that its impact, modest to begin with, was already priced into the market.

SPR release

Discussions about the potential use of the strategic petroleum reserve (SPR) surfaced weeks ago, when WTI crude neared $84 per barrel, the highest level in seven years. Nationwide, average retail gasoline prices rose to around $3.40 per gallon, although in certain localities, prices are much higher.

But crude prices immediately began to soften in early November, right around the time that SPR rumors began to seep out into public arena. By November 22, WTI was down more than 10 percent from the recent high reached a few weeks earlier.

The reasons for the price decline are multiple, and can be chalked up to some combination of a stronger dollar, concerns about inflation, rising Covid-19 cases, the return of incremental OPEC+ supply, and some potential demand destruction because prices had climbed too high. Also, against this somewhat bearish outlook, speculative moves by money managers added to a selloff.

The reasons for the price decline are multiple, and can be chalked up to some combination of a stronger dollar, concerns about inflation, rising Covid-19 cases, the return of incremental OPEC+ supply, and some potential demand destruction because prices had climbed too high.

But the plans put in place to release oil from the SPR also contributed to the weakening of oil prices.

At the same time, that was all baked into the market prior to the official announcement. On November 23, the White House announced that it was releasing 50 million barrels from the SPR, and doing so in conjunction with releases from China, India, Japan, the Republic of Korea, and the United Kingdom. “We’re launching a major effort to moderate the price of oil, an effort that will span the globe and its reach and ultimately reach your corner gas station,” President Biden said Tuesday.

Some analysts noted the historic nature of the coordinated release. “Today’s events are unprecedented at scale when looking at the recent history of the oil market. It is the first time that these countries, including China, conduct a coordinated release,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, said in a note. “The last time we saw a similar coordinated plan was during the Libya civil war in 2011, when IEA countries moved to release reserves together, but it was excluding China.”

Taken together, the coordinated releases could total around 70 million barrels, equivalent to adding 1.2 million barrels per day for roughly 2 months. Rystad also said that the move could flip the market from deficit to surplus as soon as December, whereas previously an expected global surplus was only supposed to emerge beginning in February.

Taken together, the coordinated releases could total around 70 million barrels, equivalent to adding 1.2 million barrels per day for roughly 2 months.

On further inspection, however, the impact may be less substantial than the numbers suggest. Rystad said the relief comes “too late,” given that the worst of the market tightness was arguably in September. Also, the size of the release is not overwhelming; Rystad analysts said it is “somewhat significant…but only for a few months.”

Oil prices actually rose on the news, a reflection not only of the relatively modest volumes in question, but also because, as mentioned, the move had been anticipated. The history of SPR releases suggest the impacts are short-term, modest and temporary.

How will OPEC+ respond?

There are several more caveats that come with an SPR release. Part of the headline 50 million barrels includes 18 million barrels that had already been authorized for release previously. The additional 32 million barrels are “swaps,” meaning that they need to be replaced. The government will need to buy the same amount and put it back in the SPR over the next three years.

“We think this is poor design; it would have been simpler and significantly more effective to just declare a 50mb sale, independent of any existing mandates,” Standard Chartered analysts wrote in a note.

As for achieving the ultimate objective of the release – lowering gasoline prices – the stockpiles may not do a whole lot to move the needle. While SPR talk helped lower crude oil prices, the real question is how refiners will respond. Will they ramp up processing of gasoline? That remains unclear. Moreover, gasoline prices tend to track Brent crude – a more global benchmark than the U.S.-based WTI – so any move in gasoline prices need to be reflected in Brent prices.

As for achieving the ultimate objective of the release – lowering gasoline prices – the stockpiles may not do a whole lot to move the needle.

“For drivers wondering if gasoline prices will get lower as a result of the SPR release in the US, the reality is that this may not happen at all, or only with a significant lag time,” Tonhaugen said.

A larger question centers on how OPEC+ will respond. If the group wanted, it could slow its scheduled production increases – 400,000 barrels per day per month – and offset the SPR release. Standard Chartered said that while OPEC+ may not pause its production cuts in response to the SPR, it has reason to consider such a move given that the oil market is weakening.

In other words, market fundamentals suggest a pause on production increases is a reasonable course from OPEC+’s perspective, independent of a response to the coordinated SPR releases. However, OPEC+ may have trouble avoiding the appearance that it is engaging in a geopolitical tug-of-war over oil prices if it indeed pauses the increases.

On November 24, the head of the International Energy Agency accused Saudi Arabia and Russia of creating “artificial tightness” in the market. “Today’s prices for key fuels are well in the danger zone for most of the developing economies,” IEA Executive Director Fatih Birol said Wednesday at a press briefing. In this way, the White House has put OPEC+ in a tricky situation to some degree, although the reverse is also true – OPEC+ could wipe away the SPR release at the stroke of a pen.

Right on cue, Saudi Arabia and Russia are reportedly considering a pause on the production increases, according to the Wall Street Journal. The group meets on December 2.

Ultimately, the whole exercise around the SPR demonstrates how little power the U.S. government has over short-term gasoline prices. American consumers will continue to be at the mercy of the volatile nature of fossil fuels so long as the addiction continues. The only answer is to speed up the energy transition.

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