Against all odds, oil has reacted with notable rises to the announcement by the US and its allies to release a part of their strategic reserves. There are several factors that have caused this surprising movement: the markets had discounted a greater release of reserves; In the past, these coordinated releases were of little or no use; And above all, this coordinated move may unleash the ire of the Organization of the Petroleum Exporting Countries (OPEC), which could end up generating further oil shortages in the market, putting another stick in the wheel of global economic recovery.
The US will release 50 million barrels of crude from its Strategic Petroleum Reserve, India has confirmed another 5 million barrels from its emergency reserves and the UK will contribute 1.5 million barrels. Now the announcements are expected from China, Japan and South Korea, which together could add up to between 10 and 20 million barrels. Estimates speak of China could release between 7.5 and 17 million barrels.
At first glance, these millions might seem like something ‘big’. However, it must be taken into account that daily oil consumption is 102 million barrels of crude oil, so all this release of reserves represents in the best of cases 70% or 80% of world oil consumption in one day.
To all this we must add the geopolitical and diplomatic variable, as in the case of China. Although from the first moment China has been named as one of the US supporters, the Beijing authorities have been calculatingly ambiguous about this. “China maintains close communication with relevant parties, including oil consuming and producing countries, to ensure long-term stable operation of the oil market,” Foreign Ministry spokesman Zhao Lijian said tersely on Wednesday. To this he has simply added that they have taken note of the recent actions taken by the main oil consuming countries
“A drop in the ocean”
Analysts at Goldman Sachs have titled their assessment of the release of crude reserves by the US and its allies in the war against OPEC as “A drop in the ocean”. For the investment bank more specialized in raw materials on Wall Street, the proposal will add up to 80 million barrels of crude, adding up the entire alliance, “below the more than 100 million that the market expected.”
Although the amount to be released by these three countries is still missing, the most anticipated response to the US move is that of OPEC and its allies. The cartel’s response will be the one that will move crude prices in the coming weeks and months, especially if the change in strategy implies a significant slowdown in the return to normality of its production. Several cartel delegates have already leaked that there will be retaliation, although everything will depend on the evolution of the price of crude.
OPEC is adding 400,000 more barrels a day every month right now. This strategy aims to gradually return to the market the more than nine million barrels that were cut from production (only OPEC and its allies) during the worst of the crisis. If OPEC freezes this plan, the release of reserves from the major importing powers will have had a counterproductive result.
Oil discounts OPEC decision
In addition, the decision to release a part of the reserves was already discounted in the market. That is, investors and traders Oil companies already knew that this was going to happen and, therefore, it had already had its impact on the oil market, which in November accumulated a decline of just over 6%.
Now, what is starting to trade is OPEC’s possible response in revenge for the US decision and its allies. Still, not all oil prices are negotiated in the cartel or White House months. If the new wave of covid continues to advance and the economies begin to restrict the movement, crude could resume the falls no matter what.
Warren Patterson, an economist at ING, explains in a note that the launch of reserves (SPR for its acronym in English) “was already heavily discounted and, despite prices rising after the official US announcement, the launch of the SPRs has been relatively successful. ” Since the use of reserves began to speculate, the price of crude oil has weakened.
By the end of october, West Texas was trading at $ 85, while Brent was approaching $ 87 a barrel. However, the noise about the release of SPRs in recent weeks has caused the market to trade lower. WTI is back in the $ 80 zone, while Brent is at $ 82. Had it not been for this noise, it is likely that the market would have continued an uptrend. At least now the market is aware that there is a price level that key consumer nations will not tolerate, “says the ING expert.
“However, the most important thing is how OPEC + will react to this coordinated move. The group could potentially freeze any additional production increases to try to offset the release of reserves,” says Patterson.
But this, in turn, could push the US to take more action. Although the US does not have control of the oil market, it is still the dominant economy in the world and antagonizing it does not usually have a positive result.
So OPEC + will meet on December 2 and they are likely to decide then whether changes to the deal are needed. “Our opinion is that it will really depend on what the price of oil does until the day of the meeting. If prices remain close to current levels, the group is likely to continue with its plan to increase. production at 400,000 barrels per day each month. However, if we see prices move towards $ 70 for whatever reason before the meeting, they may very well decide that a pause is necessary. This roadmap leaves the potential likely to lead to growing friction between OPEC + and the US, “says the ING commodity expert.
The most extreme measures
So if the release of reserves does not have the desired impact, the US could implement new, more far-reaching actions. “Washington could sell more of its reserves of crude oil or even to ban crude oil exports again. However, we believe that the latter option is unlikely. This type of prohibition may affect West Texas prices, but it would be positive for Brent prices, which ultimately have a greater influence on gasoline, “the ING note said.
So far this year, oil prices have risen more than 50%. In the case of Brent futures, a benchmark crude in Europe, the rebound has been higher than 57% to more than $ 81 that marks this Wednesday. In the one of the futures of the WTI Texas, of reference in the USA, the advance has been of more than 62% until touching the 79 dollars today. Yesterday’s session ended with a rise of more than 3% in Brent and 2% in WTI while the market considered the measure of Biden and his allies as a failure before the decision-making power of OPEC and its partners. Prices are falling very slightly today (less than half a percentage point) after yesterday’s notable increases.
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