The US government has long been under pressure for rising fuel prices and renewed its call to the major oil producers to ramp up production to cool off the heating market, however, experts say the White House’s move is spurred by political concerns and aims to find a scapegoat for the inflation.
'OPEC+ remain very cautious about increasing output beyond the current pace of 400,000 barrels per month, as they still see plenty of Covid and supply disruption related risk to the demand outlook,' ADM Investor Services' chief global economist Marc Ostwald told Anadolu Agency, citing group's monthly oil report released on October.
Although supply is currently in deficit due to fuel-to-oil switching in power generation and this shict could increase demand as much as 600 million barrels, Ostwald attributed the cautious output increase of the OPEC+ group to its expectation for a supply surplus in 2022.
Highlighting the group's remarks about oil supply outages in the US, Canada and Mexico as contributing to the squeeze on oil prices, Ostwald said it obliquely tells the US that 'nothing that we can do about your temporary supply disruptions.'
Recalling Putin's comments at Russia Energy Week on Oct. 15, Ostwald said Russia would be open to a bigger increase in production, though this may be more of a modest concession.
Putin said $100 a barrel for oil is possible, still, an oil price volatility is not in favor of OPEC+ group, Ostwald noted.
'What one always has to bear in mind is that rising gasoline prices is a very sensitive political issue, so most of the US comments are more for domestic consumption, i.e. along the lines of 'don't blame us. It's those nasty greedy people from OPEC and Russia,' he said.
Ostwald described the US intention to threaten oil producers with anti-trust lawsuits as 'a largely empty threat,' and said the move also aims to show the US people who to blame for 'the upward pressure on energy prices,' and also shows the US can 'boss' these oil producers.
Ostwald said the recent rise in the US fuel prices cannot solely be attributed to global supply problems, but was also caused by a combination of storm disruptions in late August and the ransomware attacks.
'About 5% of US refining capacity has been lost, permanently, during the pandemic, some of it having been mothballed, and some refiners deciding that it is not worth restarting aging refineries with a limited residual remaining life,' he recalled.
- US pressure to continue
Randall Mohammed, Managing director at PetroIndustrial, pointed to the pressure of record-high natural gas and fuel prices on containing inflation, 'an issue which the US government is trying hard to manage.'
In the run-up to the November meeting, the group will reassess the supply-demand situation, the vaccination and infection rates and make a decision accordingly, Mohammed said.
'Our perspective is that this has flipped from a demand-side problem to a supply-side one. Some countries are struggling to meet their production quotas,' he said.
Mohammed recalled the term 'swing producer' and said the term defines a producer that could put 2 million barrels per day (bpd) on the market within 90 days.
'We, however, note that Saudi, United Arab Emirates and Kuwait have a total spare capacity of 2.6 million bpd between them. It's a question whether they are willing to tow the line,' he added.
Mohammed predicts that the OPEC+ would ride out the higher prices as long as possible.
Although Saudi Arabia has adjusted its prices downwards for its preferred customers, Mohammed said that there are no signs that they would increase production.
In the short term, the US would continue to put diplomatic pressure on the OPEC+ group and so on Saudis, Mohammed said.
'They are well aware of their spare capacity,' he said and ruled out the possibility that the Biden administration would use the sale of military equipment or any other type of funding as a bargaining tool.
- What are possible US moves to intervene rising prices?
Another option that the US can use to intervene in the rising fuel prices is to tap into the Strategic Petroleum Reserves (SPR) and about 60 million barrels of oil is now on the table, however, Mohammed said this would do little to bring down the prices.
The country has the world's largest SPR of more than 600 million barrels stored in huge underground salt caverns at four sites along the coastline of the Gulf of Mexico.
Although tapped under the Clinton and Obama administration, Mohammed said the purpose of holding this spare capacity is to ensure energy security. 'My perspective is the SPR should not be used to balance the market. I suspect it would not be approved by Congress,' he said.
Another option that the US has, Mohammed said, is to approve leasing and permitting for drilling on state lands.
'In the run-up to the elections, Biden stated that he would ban drilling, more specifically fracking on state lands. Unlike other producing countries, the US oil industry is run by independent private companies, whose objective is positive cash flows and returning shareholders' capital. They frown on any attempt by the federal government to dictate output,' he said.
Mohammed said the oil production in the US has been declined down to 2 million bpd after the pandemic-induced demand destruction.
'Shale is not rushing back into the market,' Mohammed warned, adding that despite a steady increase of rigs, the rig count in the country is significantly below the 1,600 achieved in 2014.
He said that the rig count hit 4,000 back in the early 1980s. 'I don't think shale is dead, it is simply not in the interest of shareholders and investors to diminish margins by drilling.'
- US call for production increase
As global energy demand collapsed during the pandemic, the OPEC and its partners, known as OPEC+, adopted a historic output cut of 10 million bpd, or nearly 10% of world demand. Since then, it has gradually increased output, with the cut easing to around 5.8 million bpd in July.
In July, OPEC+ agreed to increase output by 400,000 bpd every month beginning in August until the remaining of the 5.8 million bpd cut is phased out.
On Aug. 11, US National Security Advisor Jake Sullivan called on the OPEC+ group to ramp up production to tackle rising gasoline prices that they see as a threat to the global economic recovery.
However, the OPEC+ group ignored the US' call and decided to keep its output scheme during its meeting in September.
On Oct. 6, the US Secretary of Energy Jennifer Granholm said the federal government has several tools to cool off rallying energy prices, including a potential release of oil from strategic petroleum reserves and an export ban.
Although these statements were softly refuted a day later, the US government continued its insistence on the OPEC+ producers for higher output.
On Oct. 11, a White House official said the administration was closely monitoring the cost of oil and gasoline and 'using every tool at our disposal to address anti-competitive practices in US and global energy markets to ensure reliable and stable energy markets.'
The group is scheduled to meet on Nov. 4, while the White House continues its insistence for more production and its pressure on OPEC+ group.
By Sibel Morrow and Firdevs Yuksel