US will release 50 million barrels of oil from its strategic reserves — will it affect prices?

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Well, so far, the simple answer to the question posed in the headline is “no.”

On Tuesday, the White House announced the Department of Energy will “make available releases of 50 million barrels of oil from the Strategic Petroleum Reserve to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.”

Brent crude oil price chart

SodelVladyslav/Adobe Stock

Talk of a strategic reserve release did have a calming effect on markets in previous weeks. However, when it came to it 50 million, was too little and over too long a time frame to have any impact.

Prices actually rose, with the international benchmark Brent settling up 3.3% at $82.31 a barrel on Tuesday, the Financial Times reported.

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Oil reserve delay

In part, the aforementioned result is due to not just the limited size of the release — made in concert with the U.K., India, South Korea and China — but the delay.

About 32 million barrels will be delivered between mid-December and the end of April 2022 in a swap with oil companies, which then must return an equivalent volume by 2024. The other 18 million barrels accelerate sales that Congress had already authorized, and so have no net impact.

Indeed, the 32 million will have to be replaced, depriving the market of that amount in 2023-2024. The U.K.’s release of 1.5 million barrels and India’s of 5 million barrels have similarly had no impact on the market price and show little prospect of denting gasoline’s near 60% rise this year alone.

Oil prices near historic highs

 

While not at all-time highs, both crude oil and gasoline prices are nearing historic levels.

Politically, this is a thorny issue for the Biden administration. Rising inflation is making consumers anxious. Yet, in the wake of the COP26 summit and the administration’s bold promises to tackle climate change – specifically, to migrate away from oil – releasing oil reserves and urging OPEC+ to pump more oil is bad optics.

OPEC+ has been increasing output by 400,000 barrels a month this year as it restores cuts it made last year. However, it has firmly resisted urging by Washington to increase output further. Furthermore, there is some anxiety that OPEC+ could decide at its Dec. 2 meeting to halt any further increases. That really would undermine the case for lower prices anytime soon.

The U.S. Energy Information Administration has been expecting prices to decline next year. but that may be too far off for the administration looking at the run up to midterms in 2022.

US mulls oil strategy options

The Financial Times suggests options such as banning U.S. oil exports (started under the Obama administration) and reducing the biofuel component in petrol blends are being considered.

But proposals the U.S. should charge OPEC+ with collusion or market manipulation is a risky strategy. U.S. export bans being considered could come under the same allegation. Penalties would pressure relations with Riyadh, which have not been anywhere near as supportive under Biden as they were under Trump.

With commercial inventories low, the U.S. shale industry is failing to respond to high prices by increasing output. In addition, a reluctance on the part of OPEC to pump more makes the prospects for significantly lower prices appear thin.

We may just have to live with those pump prices for some time to come.

New Year’s resolution to self: drive less.

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