Biden’s Play In Today’s Oil Market Is A One-Time Trick That Will Backfire

The White House announced today that the U.S., together with a few other countries, willrelease crude oil from its strategic petroleum reserve:

Today, the President is announcing that the Department of Energy will make available releases of 50 million barrels of oil from the Strategic Petroleum Reserve to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.

The President has been working with countries across the world to address the lack of supply as the world exits the pandemic. And, as a result of President Biden’s leadership and our diplomatic efforts, this release will be taken in parallel with other major energy consuming nations including China, India, Japan, Republic of Korea and the United Kingdom.

The U.S. will make a onetime release of 50 million barrels while the other countries together are expected to release 20 million barrels. For comparison the global consumption is about 100 million barrels per day.

Of the U.S. 50 million release 32 million are only an exchange. Refineries which buy those will later have to provide back a similar amount. The White House assumption is that future crude oil prices will sink. The refiners are likely smarter. They know that future prices will rise and are therefore unlikely to buy any of the 32 million barrels.

The total amount is thus too small to make a reasonable difference in the global market.

Oil prices have been sinking over the last days as rumors about the release made the rounds. But today they were back at rising:

In early trading on Tuesday, Brent crude for January delivery was up $1.44 at $81.14 per barrel.

In New York, January WTI on Nymex was trading some $1.04 higher at $77.79/bbl.

Traders said the coordinated SPR release has already largely backfired, in part because of the small volumes involved, and in part because the releases — acute in nature — could cause Opec and its allies to flex more structural muscle and keep a tighter lid on supply going forward.

“The total release is only [a few days] of US throughputs — it’s not substantial,” said Alex Hodes, energy analyst with StoneX Financial. “It’s a temporary fix, it’s political posturing.”

In addition, Hodes said, the market had largely priced in an SPR release and had already undergone a major sell-off — and perhaps had already reached a bottom.

The OPEC+ producer cartel had planned to increase the total output by 400,000 barrels per day in each of the next months. It may now well respond to the release by skipping that increase for a month or two. Prices would then rise further.

Previous to today’s release the U.S. had asked Russia and Saudi Arabia to increase their production. Neither of those countries likes the Biden administration’s behavior towards them. Both said “no”. Had Biden stopped the continues provocations towards Russia, or had he invited the Saudi clown prince Mohammad bin Salman to the White House, the outcome might have been different.

But the White House continued to see need to “do something” and the coordinated SPR release was all it could come up with.

That coordination is of interest as it is the first time that there is a kind of buyer cartel countering the producer cartel. But the buyers have – in the end – much less power than the producers and would lose out should this become a race between strategic reserve releases and production cuts.

While the White House claimed that China is involved in the reserve release there is some doubt that China will actually do something. China does not publish its reserve numbers. Also note that the European Union countries are completely missing here. The view in Europe is that a price of oil at $80/barrel is not unreasonable and no need for alarm. Crude reserves are held for strategic purposes, not for attempts to manipulate a market that is otherwise working well.

The problem with gasoline prices in the U.S. is regional. The average gasoline price is $3.76 per U.S. gallon. Local prices though vary much with California and some parts at the east coast seeing average prices at $4.70/gal and above. That variance is a problem that crude oil price movements can not fix.

Today’s announcement was a one-time move that is likely to fire back. For now it may help Biden in the polls. But the effect will soon vanish and prices will go up again.

The only way to influence producer countries to pump more oil is by decreasing U.S. hostility against them. As Biden is unwilling to do that he will doom the democrat’s chances in the midterm election.