Oil prices have dipped to their lowest levels in six weeks, with both Brent and WTI dropping below the psychologically important $80 per barrel mark for the first time in weeks. Brent was quoted at $79.67/barrel in Friday’s intraday session, with WTI trading at $77.65 as talk of several countries releasing crude from their strategic reserves continued to gain momentum. According to Reuters, the Biden administration has reached out to several countries, including China, India, South Korea, and Japan, urging them to synchronize the release of crude from their Strategic Petroleum Reserves (SPRs) in a bid to lower global energy prices.
On the opposite side of the spectrum, European gas prices have recovered from their intra-week lows as indications of Russian supply flows remained disappointingly low.
According to the Financial Times, whereas Gazprom (OTCPK:OGZPY) started adding some gas to its largest storage sites in Germany and Austria last weekend, Russia has failed to book additional pipeline capacity, suggesting that any storage fill would come from existing flows.
“Russia has done what it said it was going to do, but in a very narrow way. What would get a bigger reaction from the market would be if Gazprom went back to auctioning short-term gas supplies, as they have done in previous years,” Laurent Ruseckas at IHS Markit tells FT.
Front-month UK National Balancing Point (NBP) gas rose by 1.89 pence (p) per therm w/w to USD 204.79p/therm on 15 November, a strong rebound from the settlement of 178.98p/therm on 10 November. Dutch Title Transfer Facility (TTF) gas rose by EUR 0.873 per megawatt hour (MWh), before surging above EUR 89/Mwh on 16 November in the wake of the temporary suspension of the regulatory approval process for the Nordstream 2 pipeline.
Also worth noting: The price of EUA carbon allowances has been bolstered by the COP26 meeting, and in particular by the completion of the Paris Agreement’s carbon trading framework. The front-month EUA contract rose by EUR 5.30/t w/w to an all-time high of EUR 65.93/t on 15 November.
While gas prices remain strong in other regions, US prices have continued to fall thanks to a relatively comfortable inventory position due to a warmer-than-usual start to the winter and, of course, the latest SPR developments.
According to the American Gas Association (AGA), there were 96 heating degree days in the week to 13 November, 28 fewer than normal (i.e., warmer conditions than normal). The cumulative number of degree days since the start of October stands at 421, 134 fewer than normal and 27 fewer y/y.
Front-month Henry Hub gas prices declined USD 0.41 per million British thermal units (mmBtu) w/w to USD 5.017/mmBtu.
Coordinated SPR release
Biden’s highly unusual move comes just months after he made another unusual request to OPEC+ to boost production so as to tame the oil price rally. Predictably, OPEC+ declined the offer and has stuck to its earlier routine to boost output by 400,000 bpd a month that it started in August until the rest of the 5.8 million bpd cut is phased out.
However, Biden’s SPR move is a different gambit altogether because, unlike OPEC+, which is clearly interested in maintaining high oil and gas prices, China and India have already begun releasing crude from their SPR’s with a similar end-game to Biden’s: Lower oil prices.
China does not disclose the volumes of crude flowing into its strategic and commercial stockpiles. However, it’s possible to work out an estimate by deducting the total amount of crude available from imports and domestic output from the amount of crude processed.
Calculations based on this method reveal that China drew ~589,000 bpd from its SPR in May; 980,000 bpd in June, and ~223,700 barrels per day in July. HFI Research estimates that China’s SPR capacity sits at between 840 to 1,260 million bbl, with current reserve levels closer to the lower end of that range.
Meanwhile, crude imports for the first eight months of 2021 clocked in at 10.4 million bpd, down 5.7% from the same period last year.
Back in June, Beijing announced huge cutbacks in import quotas for the country’s private oil refiners. According to Reuters, China’s independent refiners were awarded a combined 35.24 million tons in crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago.
The story is pretty much the same in India.
India announced in August that its SPR will be more active, although its relatively small size compared to China’s makes its impact more muted.
India has started selling oil from its SPR to state-run refiners as part of efforts to commercialize the storage. Reuters reported 5.5 million barrels are in the process of being sold, while Indian newspaper Mint reported on Sept. 12 that a total of 4.3 million barrels would be sold to two refiners by December.
These are relatively low volumes, representing little more than one’s day demand for India.
Done on an independent basis, SPR releases from either the U.S., China, or India might not do much to unsettle the global oil markets. A coordinated release by 4 or 5 of the biggest SPRs is, however, a different story.
President Biden has faced calls for action from various parts of the Democratic Party,
including the Senate Majority Leader Chuck Schumer, who on 14 November demanded “immediate relief at the gas pump”. U.S. gas prices have surged 60% since the beginning of the year, with prices in California hitting all-time highs.
However, the key advisors in the White House currently appear to be split along the lines of their main area of expertise.
The economic and political advisors to the president (who are generally in favor of early action against gasoline prices) point to falling presidential approval ratings and worrying inflation readings. Energy advisors to the president (who are generally more willing to wait) point to the gasoline price forecasts in the Energy Information Administration’s (EIA’s) Short Term Energy Outlook; the EIA expects gasoline to average USD 3.16 per gallon (gal) in December, down from the current national average of $3.41per gallon, and between USD 2.99-3.02/gal in each of the first six months of 2022.
According to Standard Chartered analysts, the best result for the administration would be that the market stays in the current holding pattern for an extended period. A sharp oil price rally above USD 85/bbl would likely force a release of reserves, but the more that time goes by, the more we expect fundamentals to become more comfortable, and the less credible the calls for a rapid rally well beyond USD 100/bbl are likely to become.
The analysts say that calls for a release have led to a situation whereby a significant amount of money is on the side-lines of the market looking to buy the dips after any actual release. While many traders doubt the credibility or the effectiveness of an SPR release, few would wish to be caught in an exposed long position at the time a release happened, and keeping that money out of the market has taken the momentum out of the price rally. The threat of a release has already gained the US administration at least two weeks of extra time.
Losing some credibility among oil traders by not releasing quickly seems a relatively minor cost in terms of the time gained and the underlying weakening of market fundamentals and the associated dispersal of the market-tightness fear factor.
By Alex Kimani for Oilprice.com