RPT: ANALYSIS - 'New Drama In Oil Swings' Seen In OPEC, Consumers Battle


RPT: ANALYSIS - 'New Drama in Oil Swings' Seen in OPEC, Consumers Battle

NEW YORK (UrduPoint News / Sputnik - 24th November, 2021) A new drama in world oil price volatility is expected with producers likely to tighten output further as major consumers release their crude reserves to push the market lower, commentators on energy markets told Sputnik.

On Tuesday, the US Energy Department said that President Joe Biden had authorized the release of 50 million barrels from the country's Strategic Petroleum Reserve. India and Britain followed up with announcements of a 5-million barrel and 1.5-million barrel release from their reserves, respectively.

"We're probably in the phase of a new drama in oil swings," John Kilduff, founder of the Again Capital energy hedge fund and a prominent commentator on oil, said.

The United States' first ever coordinated release of its oil reserves with other consuming countries could be "a momentum killer that could certainly short circuit the rally and push prices lower" for crude, Kilduff said.

Yet, the Saudi Arabia-led OPEC, or Organization of the Petroleum Exporting Countries, and its allies might strike back almost immediately with output reductions that could push the market back up, cautioned Kilduff.

"If the Saudis are upset by this, they could dial back in post-haste. Because essentially, the Saudis would be signaling that they want higher prices than actual barrel count," he said.

Edward Moya, head of US research at brokerage OANDA, concurred with that view.

"The focus is now solely back on OPEC and no one would be surprised if they scaled down their production plans given the short-term uncertainties to the crude demand outlook and some vengeance for the coordinated tapping of oil reserves," Moya told Sputnik.

China, South Korea and Japan are also expected to join the US plan after producers in OPEC+ repeatedly ignored calls by the consuming countries to pump more crude to match soaring demand for energy in economies emerging from the coronavirus pandemic. OPEC+ groups the 13-nation Saudi-led OPEC with 10 other oil producers steered by Russia.

US Energy Department in a news release said today's decision is in response to the highest oil prices experienced in seven years and aims to ensure adequate supply as we exit the pandemic.

Oil prices had risen more than 60% this year due to short supply versus demand, with OPEC+ focused on recovering from a market that crashed the prior year on demand destruction related to the COVID-19 crisis.

The West Texas Intermediate (WTI) benchmark for US crude fell to a historic minus $40 per barrel in April 2020 at the height of the COVID-triggered oil price crisis. That prompted OPEC+ to launch the steepest ever cuts in world oil production.

Since then, WTI hit seven-year highs above $85 in October while Brent rose above $86, responding to the OPEC+ supply squeeze.

That has led to soaring inflation in oil consuming countries, particularly the United States, which is grappling now with its worst price pressures in more than 30 years.

Energy Secretary Jennifer Granholm earlier said working families and businesses were forced to pay the price because oil supply has not kept up with demand.

Only in recent weeks, had oil prices fallen from their highs.

But they rebounded on Tuesday as traders expected a swift response to the consumers' actions from OPEC+.

"This oil market deficit will not go away anytime soon," said OANDA's Moya. "The US may need to consider another SPR release, but even if they talk about it, energy traders know that OPEC+ controls this market."

Biden in a televised address alluded to Tuesday's release as being inadequate to pull the market lower immediately. While these combined efforts, he said, will not solve the problem of gas prices overnight, it will make a difference. He said it may take time but before long, Americans should see the price of gas drop.

Hours after the consumer countries announced their reserves release, WTI traded at $78.64 per barrel, up $1.89, or 2.5%, by 2:25 p.m. ET (19:25 GMT). Global crude benchmark Brent rose $2.69, or 3.4%, to $82.39.

OPEC+ is due to hold its monthly meeting on December 2, but the Saudis could announce a pullback in output before that, Kilduff said.

Until Tuesday's SPR release by the Biden administration, OPEC+ had been adding about 400,000 barrels daily to its output from cuts carried out earlier. Energy market experts estimate that some 5 million barrels of regular supply is being withheld by Saudi Arabia and its allies.

"The battle line is drawn here for sure," Kilduff said. "And if WTI gets below $70, expect an even more bellicose response from the Saudis, where they'd go beyond the 400,000 barrels and into deeper production cuts."

Notwithstanding further OPEC+ cuts, the combined release of more than 55 million barrels announced so far could go some way in meeting peak heating demand for the northern hemisphere winter, said Kilduff.

"We needed about one million barrels a day extra to fill the gap," said Kilduff. "Just on its face, this should be able to get us through early January, and then, depending on what the Asians put on, it could make the difference."

Kilduff also cautioned about another unknown in the oil price drama - the emergence of new COVID-19 breakouts across Europe, which have already sent Austria into a new lockdown and Germany and others into considering the same.

"These new lockdowns are a real problem for energy demand... something not many in the energy markets anticipated," said Kilduff.

More than two million new infections have erupted each week across Europe, the most since the COVID-19 pandemic began.