Oil Futures Rally on Expected OPEC Response to SPR Release

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied Tuesday, lifting the U.S. crude benchmark above $78 barrel (bbl) as traders assessed risks of a potential supply response from the OPEC+ alliance to the multilateral release of petroleum reserves held by oil-consuming nations orchestrated by the Biden administration in a bid to lower domestic gasoline prices.

Oil traders dismissed Biden's plan to release as much as 50 million bbl of crude oil from the Strategic Petroleum Reserve as a shortsighted and inadequate solution to rising inflation.

In breaking down Tuesday morning's announcement from the Biden administration, out of the 50 million bbl of crude to be released, 32 million bbl would eventually be returned to the strategic reserve over the months ahead to replenish stockpiles, according to Department of Energy officials. Another 18 million bbl will be released as an acceleration of an oil sale authorized by Congress two months ago. Secondly, an SPR release would not change market fundamentals that are already tilting towards oversupply, according to all major forecasting agencies.

As of Nov. 12, the U.S. SPR held 609.4 million bbl of crude in underground caverns in Louisiana and Texas, with the Congressional intent of the reserve for use in emergency situations such as natural disasters and wars, not to control oil prices. The last time there was international coordination in releasing strategic reserves was in response to a supply disruption in Libya when the nation plunged into civil war more than decade ago. This time, the White House faces growing political pressure to lower domestic gasoline prices as millions of Americans hit the roads for this week's Thanksgiving holidays.

Retail gasoline prices across the United States are averaging $3.40 gallon this week, a seven-year high and more than $1 above a year ago.

The plan also envisions other major oil consuming nations to release some of their crude stockpiles, but details of that release are not yet clear, especially in China and Japan. So far, India announced a 5 million bbl release from its nationwide petroleum stocks and United Kingdom pledged a 1.5 million bbl sale from strategic reserves.

The release clearly failed to deliver the outcome the Biden administration hoped for, with both crude benchmarks reversing overnight losses to surge as much as 3% in the immediate reaction to the announcement.

Market focus now turns to the potential response from the OPEC+ alliance when the group meets on Dec. 2 via videoconference. OPEC+ in July agreed to gradually return the remaining shut-in production from April 2020, when OPEC+ cut 9.7 million barrels per day (bpd) of output in response to the pandemic, in 400,000 bpd monthly increments. Meeting monthly to gauge market balances, OPEC+ has agreed to increase production 2 million bpd since August, with 400,000 bpd of that output set to come online in December. In meeting earlier this month, OPEC+ pushed back against calls from the White House to aggressively increase their output above 400,000 bpd, arguing the market was rebalancing and projected a global surplus in the first quarter 2022. Faced with supply releases from strategic reserves, OPEC+ could simply forego another output hike in January.

Production growth in the United States, Russia and the Organization of the Petroleum Exporting Countries early next year will ultimately outpace global oil demand growth, according to all major forecasting agencies -- a trend likely to accelerate in the face of renewed COVID lockdowns in Europe.

"Everybody is predicting a surplus starting from the first or second quarter," Russian Deputy Energy Minister Pavel Sorokin told Bloomberg on the sidelines of this week's oil industry event in Abu Dhabi. "The only question is when exactly that surplus will take place -- but the difference is only a few months."

On the session, NYMEX West Texas Intermediate futures for January delivery advanced $1.75 to settle at $78.50 bbl and international benchmark ICE January Brent rallied to $82.31 bbl, up $2.61 on the session. NYMEX RBOB December futures surged 7.7 cents to $2.3372 gallon and front-month NYMEX ULSD advanced 5.89 cents to $2.3843 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges