Oil Advances With Global SPR Release Smaller Than Expected

(Bloomberg) -- Oil climbed, erasing an earlier loss, as a landmark plan from consumers to tap their strategic oil reserves was less severe than markets expected.

Futures in New York wiped out losses to trade above $77 a barrel after Tuesday’s statement from the White House. While the headline size of the U.S. release is large, a significant chunk of the crude will be borrowed -- to be returned later -- leaving traders expecting tighter balances down the line. The U.S. is making the move in concert with China, Japan, India, South Korea and the U.K.

Oil prices have hit multiyear highs in recent months amid a global energy crisis that’s added hundreds of thousands of barrels a day to consumption, while the world economy is grappling with surging inflation. The decision puts major consumers on a collision course with OPEC+, which views such a release as unjustified and may reconsider plans to add more supply at a meeting on Dec. 2. 

The main announcements so far are:

• U.S.: 50 million barrels, 18 million of which are accelerated pre-approved sales while the remaining 32 million are part of an exchange
• India: 5 million barrels
• Japan: Several days worth of volume, according to local media
• China: At least 7.33 million barrels, according to industry consultant JLC
• South Korea: Said it would release an unspecified volume
• U.K.: 1.5 million barrels

The news put pressure on the U.S. market, with so-called timespreads for nearby months weakening sharply after the announcement. However, outright prices traded higher than before the confirmation of the landmark move. That was because the total volume had been seen as largely priced in, and much of the supply is set to be returned at a later date. 

“This is not going to solve much,” said Ole Hansen, head of commodities strategy at Saxo Bank. “Only 18 million barrels for real, while the rest to my understanding will be loaned out and bought back at a later stage.”

See also: How U.S. Presidents Use Strategic Petroleum Reserve: QuickTake

The administration is prepared to take further, unspecified steps, if needed, the White House said. When asked about the potential for a U.S. export ban in the future, the administration continued to suggest that all options are on the table. 

Focus will now turn to how the Organization of Petroleum Exporting Countries and its allies will react to the release when they gather next week. Speaking before the reserve releases were announced, the United Arab Emirates said there was no need for OPEC+ to increase oil production any faster, despite pressure from major consumers. 

“The threat of more supply in the short-term certainly creates an artificially looser oil market for the next one-to-two month period,” said Louise Dickson, an analyst at Rystad Energy. “However, the move by Biden and other leaders may just be pushing the supply issue down the timeline, as emptying out storage will put even further strain on already low oil stockpiles.”

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