After consultation with allies and partners, US President Joe Biden announced on March 31 the largest release of oil reserves in history, putting one million additional barrels on the market per day on average – every day – for the next six months – to serve as a bridge to greater supply in the months ahead.
“The scale of this release is unprecedented: the world has never had a release of oil reserves at this 1 million per day rate for this length of time. This record release will provide a historic amount of supply to serve as bridge until the end of the year when domestic production ramps up,” the White House said in a press release.
The US Department of Energy will use the revenue from the release to restock the Strategic Petroleum Reserve in future years. “This will provide a signal of future demand and help encourage domestic production today and will ensure the continued readiness of the Strategic Petroleum Reserve to respond to future emergencies,” the White House added.
Energy consultant Johannes Benigni told New Europe in a phone interview on March 31 the US decision to release 1 million barrels per day from the Strategic Petroleum Reserve is helping the markets have more supply. “Normally the release of Strategic Petroleum Reserves is not necessarily a useful tool because most of the time when that happens the price does exactly the opposite. Of course, a lot right now depends on the psychology because we don’t know to what degree sanctions will be tightened down the line and that may have a huge impact if you consider the supply situation. So, of course, if the current status quo prevails we may have a loss of about 2-2.5 million barrels of Russian oil, which is a lot. If they are tightening the sanctions, of course, that could become more, and this is something that is the key question here,” Benigni said from Vienna.
“The additional million barrels a day is nice. The question is right now the markets are somehow managing because demand is depressed. We have quite a lot of reduced consumption in China because of Covid restrictions. We have reduced demand in Europe because of the high petrol price. So, all that is adding up. But we’re also in the season where the demand is not so strong. In the next few months that’s going to change so I would say one or two months from now everything is going to gear up and increase the runs in order to have more supply for the summer. That means then the supply is going to be more relevant,” Benigni said, adding that a lot is going to depend how the market is going to develop and how the sanctions are going to develop. “But one million barrel a day is fine,” he quipped.
Meanwhile, the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, agreed at a videoconference meeting on March 31 to stick to its existing deal and to adjust upward the monthly overall production by 432,000 barrels per day for May.
“They are sticking to it because they don’t really too much additional oil to offer,” Benigni said. “And they also don’t want to get involved in politics. OPEC is very clear they want to stay out of the big debate. They don’t want to politicize commodity supplies and I think that’s a wise decision,” he argued.
OPEC said in a statement continuing oil market fundamentals and the consensus on the outlook pointed to a well-balanced market, and that current volatility is not caused by fundamentals, but by ongoing geopolitical developments.
According to Benigni, the supply problem is partly driven by psychological factors and partly by real fundamental lack of supply. “Obviously, the starting point has been in the past talk about sanctions on Russian oil. The consequence that buyers of Russian oil have not purchased. Because they’re afraid when they make transfers that their funds may get blocked. They have a problem that chartering a vessel becomes difficult, insurance rates are going through the roof. All this basically make them to stay away from Russian oil,” he said on March 19. “Now as Russia is such a big supplier of about 7 million barrels of oil a day, 4.5 million of crude and condensate and 2.5 million of refined products, it is very difficult to ignore that. Today we can see that about 30% of the Russian refining capacity is on maintenance. It means they are not supplying the usual kinds of products, particularly the market is missing diesel coming from Russia so it means we have a real shortage of supply, partly because the buyers are afraid, partly because sellers can’t sell,” Benigni explained.
He noted that the volatility in the market has created another problem on the wholesale market. “The big trading houses when they are buying and selling oil, they usually are protecting the position by hedging. When you are hedging in the exchanges usually you have to provide some collateral. This is called margin money. So, when you are buying a derivative product on an exchange you usually put 10% of the value of the contract as a collateral. Because of the volatility in the market those collateral requirements have increased and are almost matching the value of a cargo,” Benigni said, adding, “that means it becomes almost impossible for a trader to hedge his risk because it becomes so expensive and therefore it is reducing the trade that is taking place. That means we are facing a real, real big problem which is partially driven by psychological and related issues which are creating volatility and volatility creates the call for more margin money uncertainty and on the other side that refineries are not producing and buyers are not buying and oil is not flowing and therefore consumers find that the petrol station price is too high”.