US President Joe Biden’s intention to reduce rising oil prices by selling oil from the country’s emergency reserves along with organizing an international force to join him is described by experts as 'a new and unchartered type of price war.'
ADM Investor Services' Chief Global Economist Marc Ostwald told Anadolu Agency that the move was 'at least a partial though passing success' given that it was hinted at and talked about as a possible intervention measure well before an actual official announcement was made.
Although the move temporarily reversed what seemed to be a relentless rise in oil price, Ostwald said the impact was watered down by the option to release 30 million barrels on a swap basis rather than an outright sale, reflecting concerns of the price levels that might have to be paid to replenish stocks.
Ostwald emphasized the 'huge paradox in the administration’s position' when the US President on the one hand preached about the need to move rapidly away from hydrocarbons, while on the other demanded higher output levels.
“No more subsidies for the fossil fuel industry. No more drilling on federal lands. No more drilling, including offshore. No ability for the oil industry to continue to drill, period. Ends,” Biden had said during his election campaign in 2020. However, since then he has been widely criticized for breaking his promise on several occasions.
The UK-based expert said the oil market’s reaction to the US announcement was a classic example of 'sell the rumor, but the fact', which he thinks reflects the point that this is not a crude supply problem, but rather a petroleum product supply problem.
Ostwald explained that the long-term underinvestment in the US oil sector since the oil price slide in 2014-2015 and the fact that US refining capacity is down some 8% relative to pre-pandemic levels caused a petroleum product supply problem.
Given that Saudi Arabia's crude stocks have declined and Iraq, one of the major producers of the Organization of Petroleum Exporting Countries and allies (OPEC+) group, has been struggling even to meet the increased OPEC+ production quota, Ostwald said it is indicative of the fact that there is not nearly as much capacity for output increases as the Biden administration narrative implies, which he said oil markets are more than well aware of.
'I would say the SPR [Strategic Petroleum Reserve] sales are primarily a domestic political statement to show US voters that the Biden administration is trying to do all that it can to contain the rise in gasoline prices,' he said.
- Tug-of-war between producers for higher prices and consumers for lower prices
Rystad Energy’s Senior Oil Markets Analyst Louise Dickson pointed to the timing problem of the US's move to sell reserves when a supply reprieve is just around the corner in the first quarter of next year.
Dickson stressed the release, which many traders deem as having an unconvincing market impact, maybe 'a case of too much, too late', as the oil market was tightest and needed supply relief in September.
'A new and unchartered type of price war is brewing in the oil market,' she warned.
Instead of patching up a tight oil market and easing prices, the announcement has unleashed more uncertainty on how OPEC+ will react, and has created a tug-of-war between producers who support higher prices and consumers who want lower prices, Dickson said, stressing the move can only lead to a very volatile 2022.
'The intended outcome of the US SPR release to lower domestic gasoline prices also remains dubious, as the release of crude supply from governments does not lead to higher gasoline supply from refiners immediately, or in the worst case, at all.'
- Investors are keeping tabs on OPEC+ meeting
According to Ann-Louise Hittle, vice president of Wood Mackenzie, the lack of concrete plans and prompt timing has weakened the downward price impact and could cause prices to rise as 'it is seen as a disappointment to what was expected.'
Hittle recalled that news of the SPR release had been widely discussed for several weeks and was already priced in the market.
She said Brent was trading near $79 per barrel on Tuesday before the White House’s SPR release announcement and at the end of the day the settlement price for Brent was $82.31, up by $2.61 from Monday’s close.
'Another reason for the price increase on Tuesday was the uncertainty on whether OPEC+ might stop increasing its production in response to the SPR announcement. The group meets on 2 December to decide if it should boost output by the planned 400,000 bpd [barrel-per-day] increment for January,' she said.
- US move to sell oil from strategic reserves
Biden had repeatedly asked OPEC+ to increase the group's output. However, the group did not relent to his demands and agreed to adhere to its production pact of 400,000 bpd in December.
On Tuesday, Biden announced his much-expected oil sale from the country’s SPR to provide additional market supply and lower crude prices.
The US Department of Energy will release 50 million barrels of oil from the SPR, the largest petroleum stockpile in the world used for emergencies.
While 32 million barrels will be exchanged over the next several months, 18 million barrels will be accelerated from a previously authorized sale by Congress, according to the White House.
The move is a coordinated effort along with other major energy-consuming nations, including China, India, Japan, South Korea and the UK.
While India announced its support for the joint move through a release of 5 million barrels, the UK called on private oil companies to voluntarily sell oil from their emergency reserves, which would total 1.5 million barrels.
Although there are uncertainties regarding the contribution of China, Japan and South Korea, the combined reserve sales from all countries so far are estimated at around 71.5 million barrels.
By Sibel Morrow and Firdevs Yuksel