ANTIGROWTH COALITION

Despite slight fluctuations, oil prices are still above $80 per barrel, bringing in additional revenues to exporters and causing indignation among importers. The latter complain about the rise in prices for oil products, primarily for motor fuel, aviation kerosene, and fuel oil. The discontent of the largest consumers of fuel reached the point that the US, without waiting for any favour from OPEC+, agreement with other countries to start selling oil from strategic reserves. This is an unprecedented attempt to lower the oil prices, which have tangibly rose recently leading to a significant increase in inflation rate.

American counteroffensive

On November 23, the US President Joe Biden announced the intention of his administration to sell 50 million barrels from the Strategic Petroleum Reserve (SPR) in coordination with China, Japan, India, South Korea, and the UK.

He explained the decision by the rising oil prices, which increase the cost of gasoline and utilities for the American consumers. “Consumers and businesses are suffering from these impacts as the supply of oil lags behind the growth in demand amid the global economic recovery after the pandemic,” the US President said.

Earlier, Mr. Biden called on the OPEC+ countries to actively increase oil production, but they turned a blind eye to his call. As a result, in early November, the oil producers decided to follow the previously agreed plan and not increase production more than planned. The plan assumes a gradual increase in oil production by OPEC+ from July by 400,000 bpd monthly in order to neutralise the restrictions of 9.7 million bpd agreed upon the member states amidst the COVID-19 pandemic. By the way, the next meeting of the ministers of the cartel is slated for December 2, when OPEC+ will have to make a decision to increase oil production as early as January next year.

In total, the US plans to sell 50 million barrels of oil from the SPR. 18 million barrels of this volume has already been approved by the Congress. Another 32 million barrels will be sold on an exchange basis in the coming months. They will be taken from all four vaults of the US strategic reserves.

The US Department of Energy announced that it will start selling the SPR oil in December.

Meanwhile, the US Senator Joe Manchin (D) leading the Senate Committee on Energy and Natural Resources said that Biden's decision would not solve the main problem created by the short-sighted energy policy of the United States. “I continue to urge President Biden to increase domestic energy production and to change his mind about the Keystone XL pipeline and allow it to be constructed, as it can provide about 900,000 bpd of oil to the US from Canada, one of our closest allies,” Mr. Manchin said.

And similar actions

Following the US, the Japanese government on November 24 confirmed its intention to sell part of the oil from its state reserves. “Japan is working with the US to stabilise the global oil market. We decided to sell part of our oil reserves in cooperation with the US, without violating the legislation governing the level of reserves in Japan,” Japanese Prime Minister Fumio Kishida said.

There is no specific data on how much oil Japan is going to sell. It is noted that the volume would correspond to several days of consumption in the country. Currently, the government reserves cover needs for about 145 days.

According to Nikkei, Japan may sell about 4.2 million barrels of oil from the reserve. According to Bloomberg, the volume of oil consumption in the country is about 3.3 million bpd.

Mr. Kisida noted that the authorities intend to replenish strategic reserves in the future.

Great Britain expects to sell 1.5 million barrels of oil from its reserves too. India is selling 5 million barrels, Bloomberg reports.

India also agreed to take 5 million barrels of oil from its strategic reserves. "India has repeatedly expressed concerns about the artificial adjustment by oil producers of supply below the demand levels, which increases prices and leads to negative consequences," said the statement of the Indian Ministry of Oil and Natural Gas. The release of raw materials from reserves will "take place simultaneously and in consultation with other major energy consumers," the ministry reported.

There is no information on the plans of other countries. South Korea announced only the fact of a possible sale, without specifying the volume. China is going to sell at least 7.33 million barrels from its reserves, according to JLC Consulting.

At the same time, Washington admits that the decision to use the strategic oil will not instantly solve the problem of high fuel prices. "But as a result, it will certainly play a positive role,” the US President believes.

A drop in the sea

The new coalition led by the US has already been called Anti-OPEC+.

Warren Patterson, head of the Commodity Markets Strategy Division of ING, said the total SPR volume released to the market will be about 71 million barrels, the largest since 1991.

At the same time, analysts consider the decision to be wrong and ineffective, that it can only have a short-term impact on the oil market. In the future, countries will still have to replenish their strategic reserves, which will only increase the demand for oil and, accordingly, may provoke a new rise in prices.

At the same time, experts do not exclude a possible further tension between the US and OPEC+, which may contribute to new volatility in the market.

Louise Dixon, Chief Oil Analyst at Rystad Energy, says the coordinated release of reserves is "the last desperate effort of the US" to influence the situation after it failed to get the OPEC+ production ramp up, which has been urged since August. “Today's historic, albeit very unusual step, is a clear message to OPEC+ that it is not the only actor on the global oil market,” the expert said.

BCS analysts also view the SPR solution as ineffective. Brent is winning back some positions, since the coordinated release of national oil reserves turned out to be not as significant as experts feared: 70 million barrels (India, China, Japan, and the UK plan to sell about 20 million barrels more, R+) instead of the expected 100 million. “Nevertheless, the growth potential of Brent or risky assets will be constrained amid the ongoing pandemic and epidemiological restrictions that impede the recovery of demand and business activities,” BCS reports.

Reciprocal move

Now that the US & Co. have publicly announced their intentions, all the attention is focused on OPEC+, which is to approve on December 2 a plan to increase oil production by another 400,000 bpd in January. This is a highly likely decision and we can safely assume that the cartel will definitely not go for an oversized increase. It is still unclear whether OPEC+ will be able to remain committed to the planned production level and not adjust it downward due to the unfolding realities. It may well agree to such an adjustment to avoid an increased supply on the oil market taking into account the reserves. This will depend on further Anti-OPEC+ actions.

At the same time, the OPEC+ member states have stated that the release of strategic reserves by the US and other countries is an unjustified action under current market conditions.

Dmitry Marinchenko, Fitch’s Senior Director of Natural Resources and Commodities Group, believes that the decision to tap strategic reserves "makes it almost impossible for OPEC+ to increase the rate of production growth. OPEC+ may also reduce the rate of production growth, motivating this with a possible decrease in demand amid new lockdowns in Europe."

Meanwhile, one of the most important players in the oil market, Russia, is likely to resist the US intention to reduce oil prices. Official representative of the Russian Foreign Ministry Maria Zakharova commented on the new US sanctions against Nord Stream 2: “The US is putting barriers with one hand, doing it very hypocritically to prevent the export of Russian energy resources to the European market and extends the other hand trying to persuade us and other producing countries to produce more to bring down the prices."

ING Group admits that OPEC+ could potentially freeze any further production increase in attempt to offset the SPR output. “This can only push the US to take further action. If prices remain close to current levels, OPEC+ is likely to continue with its plan to increase production by 400,000 bpd. However, if we see that prices move towards the $70 per barrel for any reason ahead of the meeting, they may pause the decision, " ING Group analyst Warren Patterson said.

Thus, with the emergence of Anti-OPEC+, the oil market faces new challenges. If earlier all the efforts of oil-producing countries were aimed at eliminating surplus oil from the market, at increasing demand to the pre-pandemic level and at rising prices, now the mission is to return prices to a level at which every party is safe. Otherwise, a new confrontation in the oil market cannot be avoided.