US and partners to release strategic oil reserves

The US, China, Japan, South Korea and the UK have agreed to a coordinated release of their strategic petroleum reserves (SPR) in an attempt to bring down currently high spot oil prices. The US will release 50m bbl from its SPR through two mechanisms; bringing forward an already planned sale of 18m bbl and exchanging 32m bbl with buyers in a kind of oil market repo. For the other consumers in this release, the scale of reserves that will be on offer will be much smaller: India will release 5m bbl, Japan around the same and South Korea could release up to 3.5m bbl. China has not committed to an official number but is expected to be on the order of 7-15m bbl while the UK will likely release a token amount.

The SPR release achieve the opposite reaction of what was likely intended with both WTI and Brent futures rising and Brent actually moved solidly back above USD 80/b. We expect there will have been an element of short position covering as an SPR release had been expected since the last OPEC+ meeting at the start of November when the producers’ alliance stuck with their plan to add 400k b/d per month, rather than accelerate the pace of production increases. But the overall size of the release is also relatively modest. For the US, 50m bbl represents around three days-worth of refinery input while India’s oil demand runs around 5m b/d, meaning the impact of the SPR release should be quite modest in terms of addressing tight oil markets.

Eyes will now turn to OPEC+ as the group has said that they would take action in the event of an SPR release. OPEC+ next meets on Dec 2nd and they may choose to slow their pace of production increases, taking them to 200k b/d per month for example, or bring them to a halt altogether. OPEC+ ministers have warned consistently that markets will move into oversupply in 2022—which on currently fundamentals still looks apt—as a rationale for their go-slow approach on returning production taken offline during the pandemic.

The back and forth between the grouping of consumers and OPEC+ will likely move away from oil market fundamentals and more into the realm of geopolitics. Notably, the US and China have found common ground in trying to address the negative impacts high energy costs are having on their economies.

In the coming weeks as liquidity in the market dips in line with seasonal trends, we expect oil prices could endure some substantial volatility, both in reaction to OPEC+ strategies and as the market absorbs the SPR release. Taking a longer run view on prices based on price levels seen in December is likely to be risky and using price moves next month to rationalize strategies lasting several months in 2022 may end up needing a hasty climbdown from entrenched positions.