In order to stabilize oil prices, US President Biden announced on March 31 that he would release 1 million barrels of oil from the strategic oil reserve (SPR) every day in the next six months, with a total of 180 million barrels of oil. This is the third time that the United States has used its strategic oil reserve in half a year, and it is also the largest release since the establishment of its strategic oil reserve system 50 years ago. The U.S. Department of Energy announced the details of the sale the next day. The urgently released oil will enter the market in two phases. The first 90 million barrels will be released from May to July and the other 90 million barrels will be released from August to October.
Meanwhile, the 31 member states of the international energy agency agreed on April 1 to release oil reserves again to deal with the market turmoil caused by the conflict between Russia and Ukraine. This is the second emergency release of oil reserves by the International Energy Agency this year and the fifth in its history.
According to the U.S. energy information administration, as of the week of March 25, the U.S. strategic reserve was 568 million barrels, the lowest level since 2000. 180 million barrels is equivalent to consuming nearly a third of strategic oil reserves and will reduce inventories to their lowest level since 1984. 180 million barrels is about two days of global oil consumption, which caused the WTI crude oil futures price to drop nearly 7% on the same day.
However, the market view is that the long-term impact of us stockpile dumping on gasoline prices and oil supply and demand is still a question mark. Analysts believe that this may be counterproductive and will exacerbate market tensions as the United States further consumes global oil inventories when demand rises.
Biden blamed the rise in US gasoline prices on the epidemic and Russian President Vladimir Putin in his speech at the White House. He said that with the economic recovery, oil demand rebounded much faster than supply, which is the reason for the rise in gasoline costs in the United States since last year. In addition, “at the beginning of this year, the price of gasoline was about $3.30 per gallon, today it reached $4.22, an increase of nearly $1 in less than three months because Putin launched the war.” Biden said that many people around the world no longer buy Russian oil. With the withdrawal of Russian oil from the global market, the supply is reduced and the price is rising. The rise in energy prices caused by Putin’s behavior is hitting American consumers. The first step of his response plan is to immediately increase oil supply.
When asked when the measure would take effect, Biden said that the oil price had begun to fall when the rumor of reserve dumping appeared, and was expected to “continue to fall” with the release of oil reserves, and gasoline prices would also fall, but it would be delayed for several days or weeks. He said that gasoline prices “may decline significantly”, with a maximum decline of 35 cents per gallon, and the specific effect also depends on the release of oil reserves by allies.
According to the data of the International Energy Agency, Russia is the third largest crude oil producer and the largest exporter in the world. The daily export volume of crude oil is about 5 million barrels, accounting for about 12% of Global trade; The daily export volume of petroleum products is about 2.85 million barrels, accounting for about 15% of the global refined oil trade. The agency predicts that Russian oil production is expected to decrease by 3 million barrels / day since April with the entry into force of sanctions and the avoidance of buyers. At present, OPEC + insists on a moderate increase in supply every month. Only Saudi Arabia and the United Arab Emirates have a large amount of idle capacity, which can immediately help offset the gap in Russia.
“The release of additional strategic oil reserves alone will not solve the problem of Russian supply loss, but it will help.” Aaron Brady, executive director of global petroleum research at S & P global commodity insights, said, “the additional supply of 1 million barrels per day will have a significant impact on the global balance of supply and demand.”
Edward Moya, senior market analyst at OANDA, believes that the release of oil reserves in the United States this round may prevent the oil price of $150 / barrel, but the subsequent impact may not be as significant as expected by U.S. gasoline consumers. “As long as geopolitical risks remain, we should temporarily adapt to the oil price of $100 / barrel.” He said that the US Stockpile Disposal Plan is a solution of “treating serious wounds with band aids”. If the tension does not degrade, what we should really do is to keep the “ammunition” of oil reserves.
Analysts at Royal Bank of Canada released a report saying that after 180 million barrels of crude oil were put into operation in six months, the United States would run out of “bullets” in oil reserves, as member countries of the International Energy Agency needed to hold strategic reserves equivalent to 90 days of net imports. This means that in order to continue to comply with the regulation, the United States must hold 315 million barrels of strategic oil reserves. Market bulls can buy on bargain hunting because they know that there is no more strategic reserve oil to put in, and in the later stage, the United States will buy crude oil from the market to supplement the strategic reserve. In the next three quarters, the global crude oil inventory will decrease by an average of 1.8 million barrels to 2 million barrels per day.
Patrick de Haan, head of analysis at gasbuddy, a gasoline price website, believes Biden’s decision could reduce gasoline prices by 10-20 cents / gallon. However, he warned that the level of prices in the coming weeks was still uncertain, because the release of oil reserves did not occur in a vacuum, and the rise and fall of gasoline prices would be affected by other factors.
According to the analysis of Clearview energy partners, the imminent depletion of strategic oil inventories may send a bull market signal to the structurally tense market, which is similar to the signal sent by OPEC idle capacity: if the contradiction is not buffered, even a small supply interruption may lead to a sharp rise in prices.
A market analyst told surging news that the risk of Russian crude oil export reduction is the main reason for the recent rise in oil prices. With OECD oil inventories at a seven-year low, any risk of reduction in crude oil supply will have a significant impact on oil prices.
In the face of repeated calls by the United States and the International Energy Agency for increasing production over the past few months, OPEC + continued to stand still. On the 31st, OPEC + continued its strategy of increasing production slightly at the 27th ministerial meeting and decided to increase production by 432000 barrels per day in May, only slightly higher than the previous plan. Under the dual pressure of the epidemic and geopolitical conflict, the alliance of oil producing countries remained cautious and restrained. Since the conflict between Russia and Ukraine, OPEC + has always refused to get involved in this political crisis.
Releasing oil reserves is only Biden’s transitional measure. At the aforementioned White House press conference, he also accused oil companies of focusing only on profits rather than increasing production, and asked them to strengthen production immediately.
“American oil companies made nearly $80 billion in profits last year. These profits are expected to continue to soar this year. Now is not the time to sit on record profits.” Biden said, “it’s time to stand up for the interests of your country and the world.” He suggested that at present, the oil and gas industry has nearly 9000 approved but unused production licenses on federal land, and oil enterprises “either use it or lose it”.
Biden urged Congress to require oil companies to pay for wells on leases that have not been used for many years and public land they hoard but do not produce. “Companies that hold but do not use leases and idle wells must start production, or they will pay for their inaction.” According to White House estimates, the daily output of Petrochina Company Limited(601857) in the United States will increase by 1 million barrels this year and another 700000 barrels in 2023.
