Learn what Biden’s oil offensive means

by Liam Denning

President Joe Biden shouldn’t wait for an invitation to Saudi Arabia so he can get his hands on a luminous orb in the near future.

The announcement that the United States will release 50 million barrels from the Strategic Petroleum Reserve (SPR), as part of a broader measure coordinated with other countries, is a direct blow to the OPEC +, the group led by Saudi Arabia alongside Russia. It also implies a potentially important change in the role of strategic reserves in the oil market.

Rising energy prices hurt presidents at best, but because of rising inflation Biden seems especially vulnerable. This not only hurts consumers, but also provides the senator Joe Manchin a good excuse to delay or derail the president’s green-tinged spending package.

So Biden wants to show that he listens to the collective lament of America’s gas stations. Early reports suggest that in total, including other countries, almost 80 million barrels could be released.

Sold between December and January, this would provide around 1.3 million additional barrels per day. The most recent projections from the Energy Information Administration showed a global oil market deficit of about 1.5 million barrels a day in December and a surplus of 1.3 million barrels a day in January.

All the talk about the SPR seems to have helped cool prices (although the new closures due to COVID-19 in Europe are also important). In fact, oil rose Tuesday morning, possibly reflecting that earlier rumors had been digested. However, the confirmation of the release alters the supply and demand equation for the immediate future and, above all, derails the rebound that had gained strength in September and October.

That’s probably the only thing that matters to Biden, as the oil market is expected to relax in 2022. Still, OPEC + threatens to offset the release by reducing its planned production increases. It looks like it has everything to win: the group produced almost 43 million barrels a day in October, of which almost 37 million are subject to production targets.

But it’s not like that. OPEC + continues to produce below its own modest growth targets. In October, the main OPEC group supplied only half of its planned additional supply. This partly reflects the weakness of some members, such as Angola and Nigeria. In addition, it reinforces its image as a club without criteria that proclaims its flexibility and its role as “regulator”, Although it retains supply of more capable members despite high oil prices.

Citigroup analysts estimate that the OPEC + monthly average increase between August and November amounts to just 262,000 barrels a day, or between 7 million and 8 million barrels a month. As Ed Morse, Citigroup’s global head of commodities research, observes from the perspective of consumer countries releasing tens of millions of barrels, “Why should I worry about the 7 million barrel risk?”

Furthermore, curbing production now would amount to giving up market share, a concept that has caused friction between Saudi Arabia and other heavyweights such as Russia and the United Arab Emirates in the past two years.

Strategic reserves are, of course, more finite than petro-state oil reserves. So even if the United States and other countries manage to cool prices, the effect would be short-lived. Reserves would have to be replenished at some point, leading to increased demand for oil – and upward pressure on prices – in the future. In fact, most of the American liberation consists of short-term exchanges that will be superseded.

Nevertheless, USA you have room to be more aggressive if you wish. He’s flirted on and off with being a net oil exporter since late 2019, including so far this month. It is still a large oil importer (net exports are weighted with refined products), but even net crude imports only average around 2 million to 4 million barrels a day. On that basis, the SPR currently covers more than six months of net imports, much more than is necessary.

Japan, one of the other countries that release barrels, also has more than 200 days of imports, although that also includes commercial stocks.

China he’s also involved, representing something of a diplomatic coup for Biden, given the country’s importance as an OPEC + client and its strained relations with the United States on almost every other front. Taking advantage of that importance, China has spent the last decade building both strategic and commercial reserves, adjusting them to take advantage of low oil prices or to try to moderate rallies.

The measure of Biden, explicitly targeting oil prices and not a specific emergency, is more in line with Beijing’s business model. Historically, the US SPR has been “dead oil”, Withdrawn from the market and unlikely to be used except in the most extreme circumstances. If this release heralds a more interventionist approach, that would represent a major shift in the oil market, and a sign that long-standing concern about shortages, rooted in the supply crises of the 1970s, is disappearing.

For US oil producers, the release shouldn’t matter much; Longer-term futures used for hedging purposes are less likely to be affected. Bob Brackett of Bernstein Research has studied 43 large exploration and production companies and calculated that, with oil averaging $ 71 in the third quarter, they generated nearly $ 23 of cash flow per barrel equivalent, from of which only a third went to capital expenditures. The price of oil is not what slows shale production. It is the lack of trust with investors.

The measure of Biden it will probably only have a temporary effect of slowing the momentum in oil prices. But in political terms, it focuses on the short term. The threat of OPEC + it is weakened by its own nonchalance of the past few months. Retaliation would do nothing but play in Biden’s favor. After all, as much as Americans blame the incumbent president for oil prices, they are not fans of OPEC, either.