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Backfire: SPR Releases Spur Oil Price Rally

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Greeted with news that the US and other other major oil consumers are releasing crude from their respective Strategic Petroleum Reserves (SPRs) in an effort to tamp down prices, oil futures did the exact opposite.

Brent for January delivery finished up $2.61 on Tuesday at $82.31 per barrel. In New York, January WTI on Nymex closed $1.75 higher at $78.50/bbl.

The explicit goal of the US' action was to lower gasoline prices. On Tuesday, Nymex RBOB gasoline closed 7.7¢ higher at $2.3372 per gallon, while diesel was up nearly 6¢ at $2.3843/gallon.

Devil in the Details

The US will release some 50 million barrels of crude oil from its SPR.

However, 32 million bbl are exchanges to be repaid later and the remaining 18 million bbl are “an acceleration … of a sale of oil that Congress had previously authorized,” according to the US Department of Energy.

China, Japan, India, the UK and South Korea are also drawing on their SPRs, with total volumes, including those from the US, estimated at up to 70 million bbl.

The stated goal of these releases was to alleviate pain at the pump for consumers, but gasoline prices in the US barely budged in the wake of the announcement. Analysis from Energy Intelligence shows that crude costs are no longer the determining factor in fuel prices, and regardless, it takes time for changes in feedstock costs to make their way to consumers.

Traders said the coordinated SPR release has already largely backfired, in part because of the small volumes involved, and in part because the releases could cause Opec and its allies to flex more structural muscle and keep a tighter lid on supply going forward.

“The total release is only [a few days] of US throughputs — it’s not substantial,” said Alex Hodes, energy analyst with StoneX Financial. "It’s a temporary fix, it’s political posturing."

In addition, Hodes said, the market had largely priced in an SPR release and had already undergone a major sell-off — and perhaps had already reached a bottom.

Sleeping Bear

Several sources said the market is concerned that by drawing on SPRs to combat price pain rather than supply outages, consuming nations may have poked Opec with a stick.

Some noted that Opec delegates have told media outlets that they are now “reassessing” their current schedule of tapering their production quotas.

“The gloves are coming off and the battle of influencing the global oil balance and prices is getting heated between consumers and producers,” noted Tamas Varga of oil brokerage PVM. “This environment is the recipe of prolonged volatility.”

The fear is that Opec and its allies may delay their gradual production increases — the bloc had been slated to add some 400,000 barrels per day to global supplies each month.

“Opec-plus could respond to the emergence of a new and informal (but explicit) market management rival — the 'IEA-plus' coalition — by slamming the brakes on supply additions, potentially spurring Western retaliation via economic force projection (or even antitrust prosecution),” noted analysts with Clearview Energy Partners.

Rystad Energy senior oil markets analyst Louise Dickson said that Opec and its allies could simply reverse course altogether.

“The coming Opec-plus meeting will be watched closely, as it could offer an interesting supply poker game ahead," said Dickson. "If the move is seen as aggressive by Opec-plus, the group could, in theory, even cut back supply into January to maintain its profits."

And while immediate or near-term price impacts may be muted, the coordinated release of strategic flows to combat high oil prices adds a new variable to the market’s ongoing algebra.

“Today’s historic but very unorthodox move is a clear message to Opec-plus that it’s not the only actor on the global oil market stage," said Dickson. "The coordinated effort represents the formation of an unofficial demand-side alliance that keeps Opec-plus in check if it fires up prices to a level seen as unsatisfactory to spur economic growth and keep consumer purchasing power in check."

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