Why the US is dumping oil on the market and why the market won’t notice it

Joe Biden has announced that the United States will unseal some of its strategic oil stockpile to intervene in the market within months to bring down prices

Why the US is dumping oil on the market and why the market won't notice it
The market froze for a second waiting for something terrible to happen, and then the amount of intervention was revealed – 50 million barrels. Players exhaled, and after the loud statement from the US President, the price of black gold went up.

Biden’s statement “to implement part of the strategic oil reserve as part of an ongoing effort to lower prices and address supply shortages around the world” began with the obligatory “The whole world is with us”. More precisely, the US, represented by its president, stated that it was not acting alone, but with the support of other oil consumers: China, India, Japan, South Korea and the UK.

This was followed by boasting: allegedly the United States has overcome the crown crisis more successfully than any other country, and Joe Biden is a huge hero, thanks to whom the pockets of ordinary Americans have more money as a result of the crisis.

Only ordinary Americans cannot fully enjoy this extra money because they suffer from high gas station prices and excessive heating bills. But this is not the fault of the US leadership. It is the fault of an insidious enemy. The insidious enemy is not named directly, but the main point is indicated – it has caused a supply shortage in the oil market. Given that not so long ago the American leadership demanded OPEC+ to increase production, there can be no doubt who is to blame for the woes of ordinary Americans. The main thing is that it is not their own leadership.

OPEC+, and more specifically Russia and Saudi Arabia, have already been accused by the United States of manipulating the market. The irony of the situation is that by complaining about the unsportsmanlike behaviour of black gold producers, the US is now trying to put together its own cartel (with China and the UK) to manipulate the market in the direction it wants. In other words, the astonished world public is being shown an amazing thing: there are wrong cartels and there are right ones.

The USA even hastened to declare a small victory: after the announcement of their intention to print the strategic reserve, oil prices fell by 10%. True, they then began to rise. Apparently, the market was expecting something bigger. And as of today, US interventions would amount to 50 million barrels over several months. In fact, India with 5 million barrels and Great Britain with its mind-boggling 1.5 million barrels have now openly joined this interesting move. Incidentally, China has already used its strategic reserves to address domestic issues. And perhaps it will use them in the future. But this has little to do with requests and offers from the United States.

Even the most optimistic estimates, which suggest that the US President’s words about a significant number of “interveners” are not a bluff, suggest a rather modest capacity of the other consuming countries (around 20-25 million barrels). But how large are these volumes?

According to current estimates, global oil consumption is close to pre-crisis levels of around 100 million barrels per pound. The USA provides around 20% of global consumption, i.e. 50m barrels is the consumption of the USA in 2.5 days. China is second in terms of oil demand, around 14m barrels a day. OPEC+ countries, according to the latest agreements, are to increase production of black gold by 400 thousand barrels per month. That is about 12.4 million barrels of additional volume, which entered the market during December, compared to November. In January, another 12.4 million barrels will be added to it and so on. In other words, over the next two months OPEC+ will increase its supply compared to November by about 37.2 mln barrels, and over the whole winter by 85.6 mln barrels. Of course, there could be some deviations from this level, but the order of magnitude, we believe, is clear.

OPEC+ has enough to keep production low over the winter to fully cover US interventions as well as the surges of the accession countries. And that is without taking into account rising demand. And yet consumption is increasing (of course there are risks of stopping this growth). But the bottom line is that if OPEC+ countries see the US actions as a threat to global oil market stability, they will only need to maintain production at current levels for a couple of months. A decision to that effect will be taken during the next meeting. However, let’s assume that OPEC+ will keep production plans at least for December and then proceed based on the current market situation.

It is noteworthy that the OPEC+ alliance (primarily represented by Russia and Saudi Arabia) has been a guarantee of stability and predictability in the oil market, which has lacked stability and predictability since 2014. And the United States is now once again acting as a bully who does not like stability and predictability in an attempt to organise a proper cartel deal.

It is worth clarifying that OPEC+ does try to keep production just below demand. But it does so in order to maintain a market window for the excess stocks accumulated in the first half of 2020. That is, there is no imbalance in supply and demand. With this fiction, the US leadership is simply trying to explain rising prices on the domestic motor fuel market. For OPEC+ countries, optimal oil prices are in the $70-85 range.

Even assuming that the US manages to bring down the price, it will not help its domestic market of petroleum products. Its problems are imposed not upon “rising oil prices” which, unlike other energy products, demonstrate an enviable stability, but upon the price of electricity and gas that are rising in the USA, as well as in many other parts of the world. By the way, don’t the US authorities want to reduce motor fuel taxes? Now that is a good measure; it might help.

And strategic reserves will have to be replenished.

Alexander Frolov, Izvestia newspaper.