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Consumers Shake Fist at Opec-Plus With SPR Action

Copyright © 2021 Energy Intelligence Group
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Frustrated consumer nations have joined to fight Opec-plus policies that have kept the oil market tight and prices high. A coordinated release from Strategic Petroleum Reserves (SPRs) by the US, UK, Japan, South Korea, India and China comes just before the crude market looks ready to loosen anyway at the start of 2022. In the end, less than 30 million barrels might be released from the 65 million bbl on offer, and much of that must be replenished in the future, diluting the impact of the move. That makes the release largely a symbolic act to show Opec-plus — who still controls this market — consumers' displeasure at high, inflationary refined product prices, which are mostly the result of Brent prices over $80 per barrel. The market’s initial reaction to the coordinated SPR action was to push Brent up by about $2/bbl on Tuesday after the announcement. But talk of the initiative helped drive down Brent by about $8 over the previous two weeks. Details of the release also underwhelmed. The US announced the biggest volume at 50 million bbl, but 32 million bbl is simply “made available” for producers who want it and must be replaced in 2022-24. The sale is open from Dec. 16 through Apr. 30, when Energy Intelligence expects global inventories to add 1 million barrels per day due to slowing seasonal demand. The acceleration of already congressionally approved SPR sales accounts for another 18 million bbl of the US release. India and Japan are each releasing around 5 million bbl, and the UK 1.5 million bbl. The extent of China's release is unknown. However, Beijing plans to restart a summer effort to sell more than 20 million bbl of SPR oil after the uptake was less than 5 million bbl. The release was not coordinated by the International Energy Agency, whose rules require a supply disruption to facilitate such action.

Consumer nations are aware that the release won’t dent prices much and may not change Opec-plus' approach to supply management. The move is politically motivated — leaders need to be seen "doing something" to deal with rising prices. But the inclusion of China and India should alarm Opec-plus. These markets are most responsible for oil demand growth, and they will be the key outlet for Opec-plus exports going forward. And unlike their OECD brethren, these Asian countries are not shy about using SPR oil to counter high oil prices, even if India's strategic stockpiles are relatively small. A one-off release of finite SPR oil is no match for the strong, structural muscle that Opec-plus producers can flex in the market. But the release is meant to send a message, India implied. The oil price should be “reasonable, responsible and be determined by market forces,” the Indian government said. New Delhi joined the SPR action because supply was “artificially adjusted” below demand levels by producers. The US, meanwhile, remains concerned about high domestic gasoline prices and their inflationary impact — they are just 3% of the consumer price index but create at least 50% of the price swings. Japan said it was concerned that high oil prices could hamper the global economic recovery from the pandemic. Opec-plus has kept markets tight so that surplus inventories built during the pandemic demand collapse could drain. Since prices moved over $60/bbl, consumers have told Opec-plus they are making the market too tight. The US started to ask Opec-plus for more supply in August, and others like India and Japan have followed more recently.

It goes too far to say that an oil consumer platform or demand alliance has been birthed as a counterweight to Opec-plus. But producers still must take note. In a fungible oil market, Opec-plus will continue to have the power to set prices. Although an Opec-plus oil minister called the release a mistake, the move is not expected to change the group's plan to continue adding 400,000 b/d each month. Ministers meet next on Dec. 2 to discuss output policy and how to respond to the consumer cry that $80-plus prices are too high. Energy Intelligence understands that US officials had informed at least some Opec-plus ministers that the SPR release was coming and told them that it should not be seen as a hostile move against the alliance. To counter rising prices, China has already sold 100 million bbl from bulking commercial inventories since March. In protest of higher prices, India has looked outside Opec-plus for more oil. All told, the six nations in the SPR release account for 40% of global oil demand — with the US and China the heavyweights — but they collectively produce just a quarter of global liquids.

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