Mon. Dec 6th, 2021

President Joe Biden on Tuesday tried to deliver a Thanksgiving gift to U.S. executives and announce the country’s largest ever. release of stored oil in an effort to bring gasoline prices down.

It was a striking step for a leader who stated climate change in the middle of its legislative plan, and as one candidate said, the US needs to “switch from the oil industry”.

What has been announced?

The US has said it will release 50 million barrels of oil from its 600 million barrels Strategic Petroleum Reserve – an underground stockpile created in the wake of the 1970s oil crises.

The UK, India, South Korea, Japan and China have also agreed to release oil supplies. Britain’s planned release is for up to 1.5 million barrels. India will release 5 million barrels. Volume of the other is not yet known: Energy Aspects, a consulting firm, said it expects more details from China to appear in a few days, to distance itself from the US announcement.

The US sum covers about half a day’s global oil demand of about 100 million barrels a day. About 32 million barrels will be delivered between mid-December and the end of April 2022 in exchange with oil companies, which will then have to return an equivalent volume by 2024. The other 18 million barrels are accelerating sales that Congress has already authorized.

Tracing map showing the Gulf Coast region in the USA with the locations of the USA's Strategic Petroleum Reserves highlighted in orange circles along the Texas / Louisiana coast.  Major cities such as New Orleans and Houston are also marked.

Why now?

Other attempts to tame petrol prices, including requests for Saudi Arabia and the Opul + producer group to pump more oil has so far frustrated. At a Financial Times conference last month, the administration first indicated the possibility of leveraging the strategic reserve, when Jennifer Granholm, U.S. Secretary of Energy, announced a release. was “under consideration”.

The announcement of plans to unleash more fossil fuels ahead of this month’s COP26 climate conference would have been politically uncomfortable, analysts said. The administration also needed time to negotiate with partner countries.

Meantime, inflation has emerged as an urgent domestic issue. Republicans cracked down and blamed Biden’s climate policy for gasoline prices, which are about 60 percent higher than a year ago.

“Given the unprecedented economic shock of the pandemic, the disruptions in recovery and the current concerns about inflation, it is understandable why the administration would take this step, ”said Jason Bordoff, co-founder dean of Columbia Climate School.

Will it lower prices?

The oil market expected a larger inventory release than the one announced by the US. Crude oil rose in response on Tuesday, with the international benchmark Brent rising 3.3 percent at $ 82.31 a barrel.

“Threatening it and talking about it was pretty good,” says Jamie Webster, senior director of the BCG Center for Energy Impact. “But as you can see from the prices. . . it does not really have an effect that anyone had hoped for. ”

Amrita Sen, Energy Aspects’ director of research, said the release was “a symbolic move” that would have little long-term impact. The release could take six months, the oil will have to be replenished and most of it is “sour”, high-sulfur crude when the market is tighter in “sweet” grades, she said.

Traders will now focus on the Opec + meeting on 2 December. The Saudi Arabia-led producer group increased inventories by 400,000 b / d each month as it restored production it cut last year. But it could now interrupt those increases, analysts say.

Opec did not respond to requests for comment. “All market developments will be reviewed at next week’s ministerial meeting,” said a person familiar with the group’s position.

West Texas Intermediate Line Graph ($ / barrel) showing US oil prices rising as the world emerges from the pandemic

How will geopolitics play out?

Until Tuesday’s announcement, America’s biggest oil release came during the 2011 civil war in Libya, when crude oil prices threatened to rise above $ 120 a barrel. The International Energy Agency coordinated that release and it was supported by Saudi Arabia.

The IEA was not involved in this one and some European countries have objected to the use of emergency supplies for political reasons, according to a person familiar with their position. The White House has instead turned to large Asian consumer countries, underscoring a shift in market forces since industrialized countries created the IEA after the 1973-74 oil crisis.

The release could also mark a new twist in U.S. relations with Opec +. It was Donald Trump who persuaded Saudi Arabia and Russia, during last year’s brutal oil price crash, to reduce production in an effort to drive up prices and save the American shale patch from collapse. Now the US is asking for the opposite.

The SPR release would not have improved the mood in Riyadh. “The Saudis apparently do not like to be supported in a corner,” says Helima Croft, head of global commodity strategy at RBC Capital Markets.

She “does not completely rule out” that the kingdom could scale down planned Opul + production increases – a step that, according to her congressional Democrats, could then encourage so-called no legislation targeting the antitrust group.

What can the US do next?

The Federal Energy Information Administration even before Tuesday’s announcement said that oil and gasoline prices are likely to fall next year anyway.

If not, “the president has a lot of tools he looks at – and those tools remain on the table,” Granholm said Tuesday.

A ban on crude oil exports, which was only liberalized during the Obama administration, is one remote possibility, analysts said. Reducing the biofuel component in gasoline blends is another option.

More rhetoric about collusion or market manipulation by US oil producers is also plausible. The Biden administration has already tried to explore potential price reduction and encouraged the industry to increase production.

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