Prof. ST Hsieh
Director, US-China Energy Industry Forum
April 6, 2022
IEA’s announcement today sends another signal to the global oil market. Further, the plan calls for a coordinated release with Biden’s announced release of US SPR at the rate one million barrels per day starting from May for six months. US DOE has announced some details of the release. There is one major unknown: price!
IEA’s announcement of 120 million barrels release includes Biden’s plan so the net release amount from IEA is about 60 million barrels. There are 31 nations in IEA so specific assignment for each nation remains to be announced. Further, there are different grades of SPR, details also need to work out. IEA’s effort is to offset Russian oils sanctioned off the global market at a level of three million barrels per day. However, the global balance of oil supply and demand would not be affected significantly. There are too many unknows including the COVID-19 pandemic or recovery which will affect the demand side of the calculus. On the supply side, if Iran nuclear deal is signed then there could be additional one million barrels per day for the market. There are other risks or uncertainties:
SPR facilities were built many years ago and the current release plan is unprecedented so the SPR infrastructure will be tested to the extreme. For example, US SPR releasing mechanism including pipes, pumps, barges etc. has never been tasked to release around one million barrels per day continuously for six months in a row.
Another ominous sign of this announcement is that it covers six months from May to October. Does it mean that the US expects the Ukraine war will NOT end before October? How will the endless war impact on the US mid-term election?
PARIS—U.S. allies are planning to release close to 60 million additional barrels of oil from their reserves, officials familiar with the matter said, joining the Biden administration in an effort to tame prices after they rose sharply when Russia invaded Ukraine.
The 31-member nations of the International Energy Agency—which include the U.S., most of Europe, Australia, Japan, Mexico and others—are planning to announce a new reserve release totaling 120 million barrels, officials said, the largest release in the IEA’s 47-year history. Around half of that amount will come from U.S. reserves, which were included in Washington’s previously announced decision to release 180 million barrels of oil over six months.
That leaves around 60 million barrels of additional oil that will hit the market because of the IEA decision, which is expected to be announced by the end of the week. Those barrels are expected to be released over six months to track the U.S. schedule, an official said. IEA nations on March 1 announced the release of 60 million barrels—including 30 million barrels from the U.S.—in what was then the agency’s biggest-ever release of reserves. Biden: U.S. to
Futures for Brent crude, the global benchmark, traded down 5.2% to $101.07 a barrel on Wednesday. The IEA said last week that its members would release additional reserves but didn’t say how much.
Western officials hope the new supplies will cushion their economies as many buyers move to stop purchasing oil from Russia, the world’s second largest crude-oil exporter and third largest producer. The U.S. has already imposed sanctions on Russian oil imports, while European nations are debating whether to do so as well. Europe relies on Moscow for around a quarter of its oil imports.
Analysts are skeptical whether reserve releases will lower prices for long. Placing stored oil on the market can sometimes boost prices later on when nations buy crude to replenish their stocks, they said.
Western officials say the move can buy their economies time to replace Russian oil with supplies from other regions, mainly the U.S. and the Middle East. The Biden administration is counting on U.S. oil producers to boost production toward the end of the year to fill the supply gap.
But the countries of the Organization of the Petroleum Exporting Countries, or OPEC, have resisted repeated entreaties from Western governments to boost production since the Russian invasion. They, along with Russia and its allies, a group called OPEC+, have stuck to a previously agreed plan backed by Moscow that calls for a relatively modest increase in output.
India, meanwhile, has been stepping in to buy steeply discounted Russian oil that is no longer able to find a home in the U.S. or some European countries.
Write to Matthew Dalton at [email protected]
U.S. oil prices fall below $100 as IEA says it will release 120 million barrels from its oil reserves
Published: April 6, 2022 at 1:09 p.m. ET
By Myra P. Saefong
Oil futures declined Wednesday, with U.S. prices dropping below $100 a barrel following news that the International Energy Agency will release 120 million barrels from its emergency oil reserves. The release includes 60 million barrels from the U.S., as part of that country’s overall draw from its Strategic Petroleum Reserve, Fatih Birol, IEA’s executive director tweeted Wednesday. The Biden administration last week said it would release 1 million barrels per day from the U.S. SPR for the next six months in a move to ease high gasoline prices. In Wednesday dealings, May West Texas Intermediate crude CLK22, -4.89%, the U.S. benchmark, traded at $99.10 a barrel, down $2.86, or 2.8%. A settlement around the current level would be the lowest for a front-month contract since March 16, FactSet data show.
Will Biden’s Oil Release Bring Down Prices At The Pump?
Wed, April 6, 2022, 12:00 PM
The Biden Administration’s decision to go for a “big bang” release of strategic petroleum reserves (SPR) has successfully decreased oil prices, for now. The announced release of 180 million barrels will be spread over the next six months. This has delivered an expected change in the Brent futures curve, by shifting prices down in the short term while pushing them upwards again by comparable amounts for contracts expiring later in the year. A pivot around September 2022 can be expected, when the SPR release is likely to end, Rystad Energy research shows.
This release should provide a temporary price relief at pumps as – assuming normal refinery operations – a decrease in prompt crude prices is usually accompanied by a decrease in product prices. This comes at a time when average gasoline prices in the US are $4.2 per gallon, the highest on record.
Indeed, road traffic remains heavily subdued in North America and Europe because of extremely high gasoline prices, and in China due to lockdowns triggered by Covid-19. Soon, China will need to decide whether to persevere with its economically costly zero-Covid-19 policy in the face of rapidly increasing infections.
“The release of 180 million barrels over 180 days will likely result in 1 million barrels per day (bpd) on average, against a potential drop in Russian crude exports of over 2 million bpd. This historically large SPR release is the right decision in the current crisis and consumers should feel the benefit soon, but it only solves half the problem,” said Claudio Galimberti, Senior Vice President, Analysis.
The SPR was established 50 years ago, with an expected life span of 25 years. As such the infrastructure is dated and may be prone to faults and hiccups. The release will lower the SPR level significantly, thus sowing the seed for a future price rally when demand for crude will increase from the need to replenish the stockpile. The crude quality of the release is likely going to be split evenly between sweet and sour grades.
Global balances over the next 12-18 months remain unchanged
Depending on the speed of the SPR release and its duration, it is expected that global S&D balances will be temporarily altered. Assuming an average SPR release of 1 million bpd for the next 180 days – and keeping everything else constant, including OPEC+ production and no swings in demand – supply and demand balances should be less tight over the next six months.
In particular, stock draws in the third quarter will be less pronounced and result in only a 0.3 million bpd average draw for the quarter vs. the 1.3 million bpd average draw before the SPR release. However, assuming the SPR will need to be replenished over the course of the fourth quarter and most likely 2023, an increase in crude demand should be expected.
While the pace and duration are difficult to estimate now, the rise nevertheless looks inevitable. From that standpoint, the “big bang” SPR release makes very little change to the 2022-2023 global liquids balance.
The OPEC+ group of oil-producing nations said last week it would aim to raise production by 432,000 bpd in May, continuing with a monthly plan agreed last year to gradually replace output cut at the start of the pandemic.
There have been no pledges by the UAE or Saudi Arabia to tap into their spare capacity and fill the yawning gap between the pledges by OPEC+ and actual aggregate production, which in February – before the sanctions on Russia – stood at almost 1 million bpd.
At this pace, and assuming a Russian crude production loss of 2 million bpd going forward, OPEC+’s gap between pledges and production in May could widen to 3.2 million bpd.
The UAE and Saudi Arabia do not feel the need to break their alliance with Russia and OPEC+, which has for the past 24 months been extremely successful at rebalancing the global market following the largest demand dislocation in living memory that was triggered by the pandemic.
While OPEC has stayed the course on volumes, Saudi Arabia continues to take advantage of the tightening market by raising its official selling prices (OSPs). Another rise in Saudi OSPs is projected for Asia for May – clearly pointing to a tight medium sour market.
Russian crude export flows
There are robust signals that Russian crude exports have been holding up so far, but with unknown destinations. These barrels could end up increasing floating storage levels if they don’t eventually find a buyer. Other options include higher exports to India and, above all China, if these two countries decide to trade-off risks of being sanctioned by the US against the benefits of Russian Urals’ steep discount; The last option for Russian crude exports would be crude blending, in order to make its origin less clear.
Nevertheless, the EU on Tuesday edged closer to banning Russia’s oil imports, which would result in a major structural shift in crude flows from Europe to Asia, as Europe has been a major destination of Russian oil so far. It is estimated that up to 2 million bpd of Russian crude production may be lost if the EU bans Russian oil.
By Rystad Energy
USA Strategic Petroleum Reserve May be Prone to Hiccups
Wed, April 6, 2022, 10:06 AM
This article was first published on Rigzone here
The U.S. Strategic Petroleum Reserve (SPR) was established 50 years ago, with an expected life span of 25 years, and as such, the infrastructure is dated and may be prone to faults and hiccups.
That’s according to Rystad Energy, which outlined that the Biden administration’s decision to release 180 million barrels from the SPR over the next sixth months will lower the SPR level significantly. The company noted that this will sow the seed for a future price rally when demand for crude will increase from the need to replenish the stockpile.
Describing the release as a “big bang”, Rystad said it should provide a temporary price relief at pumps as, “assuming normal refinery operations, a decrease in prompt crude prices is usually accompanied by a decrease in product prices”.
The SPR is a U.S. government complex of four sites with deep underground storage caverns created in salt domes along the Texas and Louisiana Gulf Coasts. The SPR inventory, as of April 1, 2022, was 564.6 million barrels, comprising 249.8 million barrels of sweet crude and 314.8 million barrels of sour crude, the U.S. Department of Energy’s (DOE) website highlights.
First oil was delivered to the newly constructed SPR – 412,000 barrels of light sweet crude – back in 1977, according to the DOE site, which reveals that the largest amount ever held in the SPR was 726.6 million barrels back in 2009. The maximum nominal drawdown capability of the SPR is said to be 4.4 million barrels per day and the time for oil to enter U.S. market from the SPR is said to be 13 days from Presidential decision.
Following U.S. President Joe Biden’s authorization of the release of one million barrels per day from the SPR for the next six months, the DOE’s Office of Fossil Energy and Carbon Management recently announced a notice of sale of crude oil from the SPR. The first 90 million barrels will be released between May and July through two notices of sale totaling 70 million barrels, and 20 million barrels already scheduled to be released in May 2022, the DOE noted. The remaining 90 million barrels will be released between August and October 2022, according to the DOE.
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