What Biden’s historic decision to release oil reserves means for the market

US President Joe Biden is planning the largest release of oil in history from the nation’s Strategic Petroleum Reserve and other major oil producers said they will continue their gradual increases in production, but the Analysts believe the measures will only be a temporary solution to global supply shortages. .

“Launching SPR is like putting duct tape on a leaky ship: it will hold for a bit but it won’t hold,” Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.

Biden authorized the release of 1 million barrels of oil per day for the next six months from the US Strategic Petroleum Reserve. The White House said in a statement that the “scale of this release is unprecedented.”

Even so, “the volume of the Russian [oil] barrels is monstrous compared to the amount stored in the SPR,” Raj said.

Oil futures had risen since last fall before the Russian invasion of Ukraine on February 24. The US benchmark, which had traded near $94 a barrel before Russia’s attack on its neighbor, briefly traded above $130 in early March as crude jumped to nearly 14-year highs.

“Launching SPR is like putting duct tape on a leaky boat: it will hold for a bit but it won’t hold.”

— Manish Raj, Velandera Energy Partners

According to the Energy Information AdministrationRussia exported more than 45%, or 4.7 million barrels per day, of the 10.1 million barrels per day of crude oil and condensate it produced in 2021. The US SPR, meanwhile, contained a total of 568.3 million barrels of crude oil and crude oil, as of March 25, according to the Department of Energy.

At about 568 million barrels, the SPR is already at its lowest level in 20 years, Raj said, and any barrels withdrawn from the stockpile “have to be replenished eventually, so where will those future barrels come from to replenish the SPR?” “

In fact, there are logistical challenges involved, said Peter McNally, vice president and global sector leader at Third Bridge, who said it would take months to complete the release of 180 million barrels from underground storage.

Another challenge would be converting crude oil into fuel for consumers, he told MarketWatch in an emailed comment. “Since the start of the pandemic, the United States has lost more than 1 million barrels per day of refining capacity,” McNally said.

SPR launch news sent Oil prices fall sharply on Thursdaywith the US benchmark crude May West Texas Intermediate CLK22,

was down $7.54, or 7%, to settle at $100.28 a barrel on the New York Mercantile Exchange, while the most active global benchmark June Brent crude BRNM22,

it settled at $104.71, down $6.73 or 6%, on ICE Futures Europe.

Raj noted that while spot oil prices were down, long-term oil prices were up, “confirming the view that the SPR release will ease a short-term crisis” in supplies. June 2022 Brent crude was lower, but December 2023 contract prices traded higher, for example.

The “2023 situation will get worse once the SPR is gone,” Raj said.

News of the SPR launch comes on the same day that the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+ and includes Russia, announced they would stick to a plan for gradual increases in oil production, OPEC+. he said he would. raise production by 432,000 barrels per day in May.

Bob Ryan, chief commodity and energy strategist at BCA Research, said the release of up to 180 million barrels of oil from the SPR likely influenced OPEC+’s decision on Thursday.

The launch would contribute “to a great extent to cover the shortfall in OPEC+ volumes returned to the market since August last year, which will exceed [1 million barrels per day] by the end of May,” he said. OPEC+ has been implementing monthly production increases of 400,000 barrels per day since August.

Still, the SPR release will be less than the 1.3 million barrels per day production increase we expected from the OPEC+ core, which comes mainly from Saudi Arabia and the United Arab Emirates, with some help from Kuwait. Ryan said.

OPEC+ may also not even be able to meet its latest production quotas for March, given that it missed its target by 1.1 million barrels per day in February, said Rohan Reddy, a research analyst at Global X, according to data. of International Energy Agency. That was due in part to geopolitical issues and general production problems in OPEC+ member countries, he said.

Thus, the market may see a shortfall of 2.5 million barrels per day “due to both the Russia-Ukraine conflict and OPEC+ production issues,” Reddy said. “The best decision for OPEC+ going forward may be to increase production, as oil prices have already risen more than 33% this year.”

OPEC+ will hold its next meeting on May 5.

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