How the US bluff with crude reserves could end in a new oil crisis

The US and other net oil importing countries have made their threat a reality. Washington has announced that it will release 50 million barrels from its strategic reserves with the collaboration of Japan, China, the United Kingdom, India and South Korea. However, this well-intentioned action can end up being counterproductive. Strategic reserves have a relatively small weight in the crude market, so their impact on the price of oil will be limited in both time and quantity. In the meantime, OPEC begins to consider a new strategy before the ‘hostility’ of the importing countries. What began as a movement aimed at reducing oil prices may end in a new oil crisis.

OPEC already threatens retaliation, according to several delegates. The release of reserves can quench the thirst for oil for a few days, but OPEC anger (and further cuts) it can have a much longer lasting impact on the price of oil. The cartel and its allies (especially Russia) consider that the current price of crude oil is adequate and to maintain the balance they can further slow down the pumping of oil and drain the impact of the release of reserves. The final scenario could be a world with less oil production and with fewer emergency reserves, that is, more expensive crude.

The US announced on Tuesday the release of these 50 million barrels from its emergency or strategic reserves (about 606 million barrels) of oil as part of a plan it has developed with the world’s main energy consumers to reduce their prices. However, the announcement was already discounted by the markets. Oil futures are rising because a larger share had been discounted and because its impact on the markets will be relatively small.

As revealed from the White House and US allied countries, the measure is designed to control rising oil and energy prices in general after OPEC producers and their allies have rejected repeated requests from Washington and others. consuming nations to open their spigots faster to meet the growing demand that has come hand in hand with economic recovery. OPEC and its allies are ‘returning’ an additional 400,000 barrels per day to the market with each passing month, a rate that the US and other countries consider insufficient.

For now, the US announcement has not only not lowered the price of crude, but futures are registering rises (the markets were pricing in a greater release of reserves than has occurred). Analysts believe that the use of strategic reserves can be bread for today and hunger for tomorrow. For instance, the entire US strategic reserve would only last 6 days of consumption of oil globally taking into account that 102 million barrels are consumed in the world per day. This data serves to understand the small weight of these barrels in the world oil market.

Ben Laidler, global markets strategist at multi-asset investment platform eToro, commented in a note that there is clearly “the risk that the release of oil reserves will be counterproductive and cause prices to rise,” he says. “Reservations (SPR) they are small, sales have been ineffective, and OPEC has little room to pump more (and may still pump less to make up for SPR sales). “

“There is no possible way that President Biden can reverse the current state of the oil market through the sales of strategic reserves,” said Jeffrey Halley, an analyst at Oanda. Only higher oil production could improve the situation structurally and this requires the oil industry to shale oil invest again.

Reservations are for little

“The Strategic Reserve (SPR) of the US, China and other countries is about 1,500 million barrels of oil, or what is the same, 15 days of demand. The risk is that the release of oil reserves will backfire and cause prices to rise. This can be seen as a short-term and desperate measure, with little follow-up given that SPRs are relatively small and are used for real emergencies, “says the eToro expert.

By real emergencies, Laidler refers to periods of real crude oil shortage. Today, oil is trading above $ 81 a barrel, a far cry from the $ 150 it reached more than a decade ago or the extreme shortages of the oil crises in the 1970s and 1980s. Now, the bluff The US with its reserves can once again recreate such a crisis. After all, the world today is totally dependent on OPEC when it comes to oil, so ‘wasting’ the strategic reserve can be a terrible decision that angers the cartel.

An extreme scenario could be a market in which developed countries have spent part of their strategic reserves and OPEC has returned to cuts as a ‘punishment’ measure. The price of oil, in that scenario, would skyrocket and OPEC would have more power than ever.

What the story says

Laidler explains that three coordinated (worldwide) strategic oil reserve sales have been seen in prior periods. In 1991 (Gulf War), where the US released some 33 million barrels, 2005 (Hurricane Katrina) and 2011 (interruption of Libya). The largest was the latter with a joint release of 60 million barrels, well below global demand for a day. This movement had a slight short-term impact on the oil market (a decline that lasted for days), which dissipated shortly after with the return of the price of crude to pre-liberation prices.

Something simulate happened in 2005 with Hurricane Katrina. Oil fell from $ 66 to $ 53 in the weeks of the White House announcement in August. However, oil resumed its upward path in November, far exceeding previous highs. The release of reserves was once again bread for today and hunger for tomorrow.

On the other hand, the US has moved only 12 times, the largest was with a sale of 10 million barrels of oil. China, the world’s largest importer, sold 7 million barrels for the first time in September. All these movements had a limited impact that barely quenched the global thirst for oil at very difficult times.

For now, “the threat of the sale of strategic reserves has achieved part of its objective, with the fall in prices and the warning of OPEC. But in reality selling is dangerous … Demand is recovering and new investment in oil it represents a small fragment of historical levels, in part due to the energy transition. This is a recipe for higher prices for longer, “says the eToro strategist.

Once the strategic reserves are on the market, the ability of importing countries to influence crude oil will be practically nil. OPEC will be able to decide at will what to do with oil production. The cartel will always have incentives to produce and sell crude (you have to make money), but it could generate some shortages in retaliation to the movement of the US and its allies, which would boost the price of oil. Simply put, the US and its allies can backfire.