Monday, 24 January, 2022

Oil consumers need to pay heed to long-term challenges

Oil consumers need to pay heed to long-term challenges

Popular News

NEW YORK: Oil consumers have been grappling with short-term market challenges. The release of strategic stocks by the US and some collaborators is one of the biggest tools in a pretty empty box. But as well as attending to immediacy, they need to think differently about the long term.

Last Tuesday, US president Joe Biden announced the release of 50 million barrels of crude from the country’s strategic petroleum reserve (SPR). Unusually, this was combined with promised provisions also by China – despite other rivalries with the US – Japan, South Korea, India and the UK, report agencies.

It is hard to disentangle the effect of the strategic stocks release from other market volatility. Prices had been dropping since October 26, partly over chatter about a possible SPR release, but more because of concerns of interest rate rises to stem inflation, and fears of renewed coronavirus lockdowns in Austria and other European countries.

When the announcement was made, prices actually rose more than $2 – the size of the release being less than expected, some representing existing commitments, and much of it representing borrowing that will be returned to the SPR later.

Yet on Friday, oil prices tumbled, down more than $8 on the day, because of the emergence of the threatening new Covid variant, Omicron, in southern Africa.

Opec+ will take these contending factors into account at its meeting on Thursday. The drop in oil prices combined with the SPR release will bolster its feeling that it has done the right thing in bringing back production very cautiously. The Biden administration should remember that, as former US defence secretary James Mattis was fond of pointing out: “The enemy also gets a vote.” Not that Opec+ and consumers are enemies – but the producers’ group is entitled to respond to actions from other market players.

Not just Opec+’s own estimates, but those of the US’s own Energy Information Administration, suggest the market will be back in surplus in the first half of next year. Holding back on its next planned monthly increase of 400,000 barrels per day, though, without waiting to see what the SPR action does to the December balances, might seem unduly provocative.

The SPR issue is interesting for what it shows about the limited options of oil-consuming states. If the sale misfires, Mr Biden could suspend US oil exports – and thereby usher in chaos in the world market and in American domestic refining. This could paint the US as an unreliable supplier and probably raise prices at the pump rather than lowering them. Beyond that, Mr Biden has few short-term options.