New Type of Price War is Brewing
A new and unchartered type of price war is brewing in the oil market, according to Rystad Energy’s senior oil markets analyst Louise Dickson.
Dickson made the statement in a comment sent to Rigzone after the world’s biggest oil consumers announced plans to release strategic reserves onto the market.
“The orchestrated release of what we estimate will be 71.5 million barrels from the U.S., China, India, Japan, South Korea, and the UK comes as a last-ditch effort after OPEC+ repeatedly rebuffed calls to increase supply and ease prices,” Dickson said in the statement.
“Instead of patching up a tight oil market and easing prices, the announcement unleashes more uncertainty on how OPEC+ will react and creates a tug-of-war between producers for higher prices and consumers for lower prices, which can only lead to a very volatile 2022,” Dickson added.
The Rystad analyst noted that the “bold” move from the oil importers has opened the door wide open for OPEC+ to adjust its supply policy downwards at its next meeting in December.
“Previously, the group has said it would increase supply by 400,000 barrels per day on a monthly basis but can easily hold back on this in reaction to the SPR release,” Dickson said.
“For December 2021, the group was set to ramp up production to 38.4 million barrels per day, though we expect the actual volumes will fall slightly short at 38.3 million barrels per day, due to persistent production weakness in West Africa,” Dickson added.
“Looking to 1Q22, the alliance may stay even more cautious on supply in light of not only the SPR maneuver but also downside demand pressure as Europe is already exhibiting risks to oil demand as mobility restrictions loom amid rising Covid-19 caseloads and governmental reaction,” the Rystad analyst continued.
Don’t Underestimate U.S. and China Will
If it turns out that the strategic petroleum reserve release fails to significantly impact the price of gasoline and oil, Dickson said Rystad would not be surprised to see further action by the U.S. and China towards both OPEC+ and/or the market.
“The market shouldn’t underestimate the will of China and the U.S., which appear to be aligned in their aim to steer the market into bearish territory to support the economic recovery and to address the increasingly risky inflationary macro environment,” Dickson said.
“The U.S., while hesitant, could add support to the dollar and downward price pressure on oil via an earlier than expected interest rate hike. China has already been adding several bearish traps to the market including lower crude imports, fuel rationing, and other macro tools intended to slow down growth to prevent the economy from overheating,” Dickson added.
A White House statement on November 23 announcing the release of 50 million barrels from the SPR noted that President Biden stands ready to take “additional action”, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply “as we exit the pandemic”.
In a White House Q&A session on the same day involving U.S. Energy Secretary Jennifer M. Granholm, the energy head was asked what other tools were being actively being considered and under what timeline. Responding to the question, Granholm said “the President has got a few options, and he will be the one to announce”.
When asked if the SPR release is a one-off, or whether it will become policy for the U.S. to rebalance the market in this way whenever OPEC starts to keep supply tight, Granholm responded by saying, “this is an unusual situation because we’re coming out of a once-in-a-century pandemic - and so, we have a very unusual mismatch between supply and demand”.
“I do know that the President has got a lot of tools that he is looking at, and those tools remain on the table. But this is an unusual situation,” Granholm added.
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