Media reports about the joint release of millions of barrels of oil by the United States, China, and Japan prompted a selloff across oil futures contracts and a decline in benchmarks over the last week. However, the trend reversed this week when OPEC+ suggested that it might tighten supply in response to the release.
The reserve release idea came from the White House, which has been scrambling to find a way to rein in retail fuel prices amid rising inflation. According to the reports, President Biden approached the governments of China, India, Japan, and South Korea with the suggestion they release oil from their strategic reserves jointly in a signal to OPEC that large consumers can also move prices, just like large producers.
Initially, the prospects of the concerted release of oil were dim, but then China announced it was preparing for a new oil tender that would offer crude from its strategic reserve. Then Japan said it had found a way to release crude from its strategic reserve legally.
The country had an issue with the legality of such a move as law states oil from the strategic reserve could only be released in times of shortage or in case of a natural disaster, neither of which applies now. However, according to a Bloomberg report from earlier today, a draw from the reserve was legal if it was made from surplus supply.
Initially, India was against the move, saying it would not have the desired effect, but according to the latest update on the topic from Bloomberg, which cited unnamed sources, the government in New Delhi was discussing the timing of the reserve release and the coordination with other large consumers.
The U.S. itself announced a release from the Strategic Petroleum Reserve today. And it was a substantial release at 50 million barrels released over several months, according to a White House press release.
Even “a 35-million barrel release from the U.S. would be significant,” according to Warren Patterson, head of commodities strategy at ING Groep. “Once you consider potential volumes from others, we are looking at something pretty substantial. The risk of further Covid related restrictions this winter and potential SPR releases might be enough to persuade OPEC+ to pause supply increases.”
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While large oil consumers confronted OPEC with reserve releases, hedge funds went on a selling spree, according to Reuters’ John Kemp. Funds sold 34 million barrels of West Texas Intermediate and 18 million barrels of Brent crude last week, out of a total 57 million barrels sold across the six most traded crude and oil product contracts.
As a result of this selloff, oil prices have been on the decline lately, especially as concern about demand in some parts of the world such as Europe has been rekindled by the latest flare-ups of Covid infections even in countries with a high vaccination rate such as Denmark. This, in turn, has added weight to OPEC’s argument about the uncertainty of demand in the coming months and the suggestion that it might need to reconsider its decision to add 400,000 bpd to its combined monthly production. This, done in response to the collective reserve release of crude, will likely push oil prices even higher despite the demand concerns.
“The battle lines are being drawn,” said John Kilduff, founding partner at Again Capital, as quoted by Bloomberg. “Certainly, OPEC and the Saudis can win this in that they are holding all the cards. They can keep more oil off the market than a SPR release can put on the market. If you see WTI get under $70, then I would expect a response from OPEC+.”
By Irina Slav for Oilprice.com
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