Oil Bull rejoices as Biden’s supply strategy backfires

President Biden’s threat to oil producers that he would force prices down has already backfired. The oil markets were not impressed with the US administration’s plan to coordinate a strategic release of oil reserves from major importers in an attempt to increase supply. While some observers believe that a SPR release could push oil prices down, most analysts have warned that it will only have a temporary effect and could ultimately trigger a price increase. OPEC + members have not even engaged in Biden’s strategy, as they saw it as flawed from the start. The release of 50 million barrels of crude oil from the US SPR would never significantly affect oil prices. U.S. analysts are now worried that Biden’s actions could end in higher oil prices.

The bid’s plan first received support from other OECD countries, such as Japan, South Korea and the United Kingdom, before it was announced that China and India would also release oil from their reserves. To really push a market down, however, there had to be a clear and potentially price-threatening oversupply on the horizon. At present, there is no such threat, with OPEC reporting a potential but small oversupply in 2022. The total commitment for all SPR releases under Biden’s plan was expected to be around 100 million barrels, which is roughly one day’s global production. Realistically, the release would take place over several weeks, which would provide an extra daily volume of 4-5 million bpd. Given how unimpressed markets were with Biden’s first release, it’s starting to look like this strategy will end up being bullish on the oil markets in the long run. Biden’s plan appears to have taken into account the market base, but has not understood OPEC +’s real impact and production capacity at present. While Saudi Arabia and the UAE have some spare production capacity, other OPEC producers and non-OPEC members are struggling to produce their agreed quantities at all. It remains unclear what OPEC’s response to Washington’s strategy will be, but rumors have already been started circulating. It is possible that Saudi, UAE and Russian oil strategists will decide not to increase production volumes, or they may simply stick to the plan for the coming months. The impact of the SPR release already appears to be waning, and oil prices are already on the rise again. At the same time, despite new covid cases across Europe, overall demand for crude oil is still expected to increase. The ongoing energy crisis in Europe and China will only increase demand for crude oil. Russia’s unwillingness or lack of capacity to supply gas to Europe and possibly China will cope with the rest. Winter is on its way, temperatures are dropping, even earlier than expected, so another gas storage volume is already on the way.

The desire to curb global oil and gasoline prices is only growing in the US and China, but OPEC + is not to blame. One of the main drivers at present for higher petrol and consumer prices is the quantitative easing (QE) used to reduce the global damage from covid. If Western and Asian leaders really want to do something about crude oil prices, they should remove QE and cheap money from the markets. Lack of cash or financial reserves will push the demand for crude oil down within weeks or several months. Blaming OPEC for high prices is like blaming Santa for the rise in consumer prices over the Christmas period. Santa Claus does not increase prices, it is consumer demand. Governments have added trillions of dollars to the market for infrastructure projects, energy transition GIGA projects or real estate boom. Cash availability drives the crude oil market. Economic growth requires energy, that’s a simple fact. Biden and his advisers should first and foremost look at their own domestic markets and crude oil and gas producers. By restricting domestic producers and supporting large-scale hydrocarbon exports while importing Russian, Saudi and other crude oil, Biden fails to solve the core problems behind high gasoline prices. OPEC and other oil producers are not behind the current bullish market sentiment, it is caused by QE, lack of investment and ineffective policies.

It will be very interesting to see what OPEC leaders decide when they meet in Vienna. The statements of OPEC leader Barkindo, Saudi Energy Minister Prince Abdulaziz bin Salman and United Arab Emirates Minister Al Mazrouei are unlikely to be diplomatic. They believe they are to blame for something for which Biden and others are responsible. In the medium and long term, Biden’s decision will almost certainly backfire. The SPR release could provide temporary relief to the oil markets, but that oil needs to be replenished at some point – and most likely at a higher price that governments will pass on to consumers and industry.

By Cyril Widdershoven for Oilprice.com

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