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OilMonster
Crude Oil November 25, 2021 02:30:11 AM

Why U.S.-Led Emergency Oil Release Failed to ‘Shock and Awe’

Anil
Mathews
OilMonster Author
At the same time, there has been an increasing amount of commentary about a rise in US shale production boosting global crude supply next year.
Why U.S.-Led Emergency Oil Release Failed to ‘Shock and Awe’

SEATTLE (Oil Monster): Oil prices rose after the United States-coordinated release of emergency petroleum stocks was announced on Tuesday (Nov 23), as the volume of extra petroleum offered to the market proved smaller than traders anticipated.

The US will make available 50 million barrels from the Strategic Petroleum Reserve (SPR), with deliveries beginning in the middle of next month and lasting through end-April next year.

The release includes 18 million barrels of outright sales previously mandated by the US Congress as part of the budget, which will be accelerated, and 32 million barrels of new swops, which must be replaced no later than September 2024.

The release "will be taken in parallel with other major energy consuming nations", including China, India, Japan, South Korea and Britain, the White House said in a statement.

India has announced it will release five million barrels. Britain will allow refiners and importers to reduce their inventories by up to 1.5 million barrels, on a voluntary basis.

Japan has indicated that it will release a few million barrels, though the amount has yet to be worked out. South Korea is discussing the details of its participation with the US.

But China has so far been non-committal, with its Foreign Ministry saying only that it would "organise a release of crude oil from state reserves according to its own actual needs".

Unless China subsequently announces a very large draw down in its inventories, the global total is likely to be in the range of 60-75 million, far less than the 100 million barrels or more some in the market had expected.

As a result, crude spot prices rose on Wednesday (Nov 24) after the announcement, reversing some of their downward trend since the start of the month.

Spot prices had been softening since the start of the month, well before the release was formally announced. Some of this may have been in response to intensifying speculation about a future sale.

The White House is likely to claim this shows the effectiveness of the stock release by reversing traders' partially self-fulfilling expectations that spot prices and spreads would continue climbing.

But it is hard to disentangle the impact of speculation about a stock release from other factors weighing on oil prices.

By the start of last month, portfolio managers had amassed an exceptionally large bullish position in petroleum futures and options contracts, especially in Nymex WTI.

Lopsided positioning has often preceded a reversal in the previous price trend as hedge funds and other money managers realise some profits, which seems to have happened in this case.

The last month has also seen a seasonal resurgence in coronavirus infections in North America and Europe, with new lockdowns and other restrictions in some areas, which could curb growth in oil consumption.

Rising inflation has sharpened expectations the major central banks will have to start raising interest rates earlier than previously anticipated, which could additionally be negative for oil consumption next year.

At the same time, there has been an increasing amount of commentary about a rise in US shale production boosting global crude supply next year.

Even before the SPR announcement, hedge funds and other money managers sold the equivalent of 134 million barrels of petroleum futures and options in the six weeks between Oct 5 and Nov 16.

It is impossible to determine how many of these sales were in anticipation of the SPR announcement and how many were related to other changes in the consumption and production outlook.

But the most probable answer is that hedge fund sales were motivated by SPR anticipation, profit-taking, a deteriorating oil consumption outlook and expectations for faster shale output growth in combination.

 Courtesy: www.straitstimes.com

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