Gas prices have surged some 80 percent since Biden took office in January 2020. He has now decided and officially announced the release of 50 million barrels of crude oil from the strategic Petroleum petroleum reserves, SPR. This release though comes in phases and as loan from SPR that is owned by the government to the market to be returned in six months’ time. 32 million in phase one and 18 million at a later date.

President Biden has actually formed an Alliance of the Willing or consumer club consisting of Japan, India, China, South Korea, and Britain who which will jointly release 60 to 75 million barrels during winter. Markets expected to hear witness 100 to 120 barrels of SPR release after lots of fanfare by the US president.

OPEC Reacts

I have repeatedly said that there’s no oil supply shortages in the market. International market is sufficiently supplied. The United States is a net oil exporter. As such how and why the country that is a net exporter digs into SPR to cool down prices.

Based on initial observations made by OPEC delegates, the expectation for SPR drawdowns was 100 million barrels plus. In reality what is currently under discussion is nowhere near that figure. To be precise, this the following is the official figures of SPR release by the members of consuming alliance:

United States of America:

50 million (32+18 million barrels)

India: 5 million barrels

Japan: 4.2 million barrels

Britain: 1.5 million barrels

China and South Korea, have not specified any numbers yet.

Amongst the consumers’ club members, no other country other than the US have provided any time schedules, crude specifications or refining destinations for the crude that’s going to be released from SPR.

OPEC quarters were initially somewhat politely amused by the move and then decided to pretend that they were concerned. However, markets didn’t react quite politely and prices rose, though modestly to $ 86.15 for Brent on Wednesday November 24. 2021.

US total SPR volume is 606 million barrels. European Union total SPR volume is stands at 825 million barrels and that of Asia put alltogether is 758 million barrels. However, most of the stocks in US SPR consist of light WTI grade crudes that is used in the country. This has led to narrowing of differentials between WTI and Brent from $ 2.6 to $1.5.

Strategic Petroleum Reserves was initiated by Henry Kissinger back in 1974 when some OPEC members decided to impose an oil embargo on the US and three other countries. Based on Kissinger’s recommendations the International Energy Agency, IEA was formed and explicitly asked OECD countries to build reservoirs and stock a volume of oil not less than 60 days of their consumption. SPR was meant for emergency situations such as wars or unprecedented disasters. Strategic Petroleum petroleum Reserves reserves is not meant for market regulations by the consumers. In this context, President Biden seems to be feeling himself at war with OPEC countries and he’s virtually using war language and rhetoric.

OPEC+ Conference

OPEC+ ministers will take up the matter when they meet for the Ministerial Conference on December 2. Couple of options are open to discuss in the regular monthly meeting of OPEC+ ministers.

1- Ministers may ignore the club members’ decision to release from SPR.

2- OPEC+ may totally discontinue to add another 400,000 barrels per day which agreed to since September, or

3- Ministers may cut and adjust on 400,000 barrels per day of addition to the market, probably to 200,000 per day. There’s enough time to December 2 for OPEC+ to have a better picture of the market.

It is needless to note that OPEC+ is vigilant and watchful of the international oil market. The Organization has experienced bitter days back in 2020 when prices moved to a negative territory, and producing countries were mostly hit by financial drawbacks and shortfalls. As such the mood in OPEC and non-OPEC is cautious and well calculated.

Nevertheless, OPEC+ is also watchful of non- market fundamentals. Most OECD member countries pumped a large volume of cash into the economy. United States has virtually printed some $6.7 trillion since pandemic started and spread late 2019. As such inflationary pressures is now worrisome and can’t be ignored. In fact, some economists have gone as far as to acknowledge the possibility of 2008 financial meltdown that nearly crippled the world economy. This would mean a severe blow to global oil demand and fall in oil prices.

Any decision on OPEC+ side will be for first quarter of 2022. Decisions related to production policy for the rest of the year has already been concluded. Contracts have been signed and refiners have booked placed their orders. In any case, OPEC+ might need to wait a little longer and watch the market’s reaction. Once sky is cleared, producers will most probably decide to compensate for the crude from the SPR. The re-emergence of COVID-19 in most of the European Union and threat of a possible slowdown in economic growth and cut in demand forecasts by IEA and now OPEC Secretariat, will affect ministerial conference decision to watch the market more closely.

Shale Oil Remains Numb

As said mentioned earlier Producers producers watch the market with caution. Back in Texas and US oil producing states, shale producers take no chances with President Biden’s inconsistencies. They said that the president allows the US to export oil when price is high and then asks OPEC to produce more to remedy higher price at pump gas stations. Washington’s main concern and worries is about price of gasoline at gas stations where the voters decide the mid-term elections in 2022.

Having said that, shale oil producers take no or little chance to borrow from banks and venture for investment to produce more shale oil and ramp up production. US administration is visibly without any energy policy neither domestic nor international.

There’s no coherent energy policy in The White House, carte blanche is shown in COP26 and using pressure tactics against OPEC and non OPEC members. Biden has personally spoken to Saudi Arabia’s Mohammad bin Salman, the UAE’s Sheikh Za’ed and President Putin to raise output. Some countries with small excess capacity have recently sounded soft on easing output and pleasing the US.

US Energy Doctrine

However, the reality is different. OPEC+ has remained committed to the organization’s ceiling by over 110 percent. What we drive from this level of adherence is that producers cannot produce. Traditionally, OPEC producers tend to lift output when price is high and members compete for higher market share. There are small pockets of spare capacities here and there within OPEC+, but there’s not much oil left anywhere to produce. This is exactly what makes the markets nervous. Market does need oil now, market wants to see excess capacity in the producing countries.

Of course, excess capacity is still there but mainly in Iran and Venezuela. Two giant and powerful producers are left out of the market and Mr. Biden cries and begs for more oil from other countries. For the international oil market, the red line is where every producer supply all it can. When excess capacity is flat. Nothing is left for the rainy days. Market tradition and culture wants to make sure of a minimum of 10 percent spare capacity. Market is pretty convinced that such spare capacity doesn’t exist due to US malicious energy sanctions against important producers with huge volumes of reserves. United States must cease weaponization of oil and refrain from using oil as a foreign policy tool.

To be more precise, president of the United States of America begs for little more oil from producers in order to combat price escalation, while so much oil isn’t reaching up to the consumers. Blame game is in rampant. Biden versus the Congress. Consumers versus producers, COP26 versus Texas. This has gone very far.

Courtesy of Iran Petroleum

Fereydoun Barkeshli

President, Vienna Energy Research Group