Oil prices, which have been on a wild rollercoaster ride this past month, retreated late on Wednesday on news that the US, the world's largest oil producer, plans to release several million additional barrels of oil into the market in the coming months.
The government is considering the release of about a million barrels of oil a day from its strategic petroleum reserves, news agencies reported, quoting unnamed sources. A total of 180 million barrels could be released over several months. It would be the largest release since the SPR was set up after the 1970s oil embargo.
It comes as President Joe Biden faces the lowest approval rating of his presidency (40 per cent), according to the latest Reuters/Ipsos poll, and the US seeks to rein in inflation that hit a 40-year high.
If the US goes ahead with the move, it would be the third time the country has tapped into its strategic reserves in the past six months, following 50 million barrels released in November 2021 and 30 million barrels in March 2022 as part of the pledge by International Energy Agency members to unload 60 million barrels from emergency stocks to stabilise energy markets.
Here is a rundown by The National on what has prompted the move, its potential impact on the oil market and why it matters.
Why is the US considering the release of additional oil barrels?
The US, which is also the world's largest oil consumer, has been hit hard by inflation after a sharp increase in energy prices this month because of Russia's war in Ukraine.
Oil prices climbed to almost $140 per barrel earlier this month, a 14-year high, after the US banned Russian oil imports to penalise Moscow for its military invasion in Ukraine and the UK said it would phase out imports of Russian crude during the course of the year. While prices have since declined, they remain highly volatile as supply struggles to catch up with rising demand.
Consumer inflation in the US touched 7.9 per cent in February, a 40-year high, as gas, food and housing prices soared across the country. The figure doesn't include the oil price surge witnessed earlier this month.
With pay raises not keeping pace with inflation, consumers are struggling to manage and have curbed spending, which is also severely affecting small businesses. This has dampened support for President Biden and congressional Democrats as they approach the midterm elections in November.
To address the situation, the US Federal Reserve raised interest rates by 25 basis points earlier this month, with several more rises expected to follow.
But the Biden administration is under pressure to take more steps, which is likely to have prompted the move to release more oil into the market and reduce fuel prices.
The additional supply of US crude could “help compensate for the relative inaccessibility of Russian crude as bilateral, multilateral and self-imposed sanctions by firms prevent dealing in cargoes from the country”, Edward Bell, a senior director of market economics at Emirates NBD, said.
The proposal also comes before today’s Opec+ meeting, where the producers’ alliance is expected to proceed with its monthly production increase to 432,000 barrels per day from 400,000 bpd.
“That the US can consider adding such a sizeable amount to markets may affirm the view of Opec+ ministers that oil market conditions do not warrant additional output from them at this point,” Mr Bell said.
How did markets react to the news?
Following the announcement late on Wednesday, global oil prices reversed an upward trend and plunged by more than $5 a barrel.
Brent, the global benchmark for two thirds of the world's oil, was down 3.92 per cent at $109 per barrel at 10.38am UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, was trading 5 per cent lower at $102.43 a barrel.
“[WTI] tanked to $101 per barrel on news that the US is considering the release of up to 180 million barrels from its strategic petroleum reserve over several months to calm soaring crude prices. That’s good, because Opec and Russia are likely to stick to their existing deal to gradually increase oil production … and the extra 32,000 barrels will certainly not ease the tension at the pump,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“Despite falling oil prices this morning, the medium-term outlook remains positive on the back of a tight supply and rising demand.”
The release of stockpiles by the US may not be substantial enough to materially lower prices, as petrol prices in the US are closely correlated to international oil benchmarks than to domestic ones, Mr Bell said.
“Running down inventories when the oil market may be moving into a structural deficit with no certainty on how or when stockpiles can be replenished could add another supporting force to oil prices in the medium term,” he said. “Even if extended over a six-month period, which would mean around 1 million bpd of additional supply, the SPR release wouldn’t be enough to compensate for what is appearing to be a material disruption to Russian crude flows.”
What additional measures could we see?
IEA member countries are planning to meet on Friday to decide on a further collective oil release, according to reports.
The agency said last week that its members were ready to release more oil into the market “if needed” to tackle soaring prices. IEA member countries have committed to releasing 61.7 million barrels of oil reserves as of March 4.
The release constituted only 4 per cent of the total storage of the IEA's member countries, which includes 31 countries, IEA executive director Fatih Birol said.
“If our countries decide [that] there is a need, we will be happy to immediately act and bring the volumes to the market.”
Why does it matter?
Oil prices are up by about 68 per cent from the same period last year, due to the Russia-Ukraine conflict as well as a faster-than-expected economic recovery and also years of underinvestment in the energy industry after prices collapsed in 2014, which restricted the output capacity of some producers.
The war in Ukraine has shaken markets further and the surge in energy prices could send the global economy into a recession.
Net oil importing countries are affected the most by the surge in crude prices, with poorer countries likely to take on more debt, run fiscal deficits, face higher food costs and potentially the risk of social unrest. A deterioration in the balance of payments may push some countries to seek assistance from the International Monetary Fund.
Balancing the market is crucial to ensure that energy prices stabilise in the short-term, in turn reducing inflationary pressures and helping consumers and economies continue to recover from two years of a pandemic-induced slowdown.
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