Oil prices up 3% despite landmark coordinated move to tap reserves

Bulk of used reserves to be returned, which means tighter balances in the future

NEW YORK • Oil prices climbed yesterday as a landmark coordinated move by the United States and other consumer nations to tap their strategic oil reserves was less severe than markets expected.

While the headline size of the US 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 US is making the move in concert with China, Japan, India, South Korea and the UK.

Brent futures rose by more than 3 per cent to settle above US$82, down from a high of US$85. Meanwhile, US West Texas Intermediate (WTI) crude rose by more than 2 per cent, to just over US$78.

That was the biggest daily percentage gain for Brent since August and its highest close since Nov 16. It also pushed Brent's premium over WTI to its highest since mid-October.

Oil prices have hit multiyear highs in recent months amid a global energy crisis that has added hundreds of thousands of barrels a day to consumption, while the world economy is grappling with surging inflation.

The decision to tap reserves puts major consumers on a collision course with Opec-plus, which views such a release as unjustified and may reconsider plans to add more supply at a meeting on Dec 2.

"From Opec's (Organisation of Petroleum Exporting Countries) perspective, a cautious ramp-up is still the way to go," said Mr Damien Courvalin, head of energy research at Goldman Sachs Group in a Bloomberg Television interview on Tuesday. "Opec has no incentive to increase production aggressively and the SPR (Strategic Petroleum Reserve) release probably comforts them."

The main announcements so far are:

US: 50 million barrels, 18 million of which are accelerated pre-approved sales, while the remaining 32 million are part of an exchange;

India: Five 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;

Britain: 1.5 million barrels.

"The added supply to the market is pretty small in the grand scheme of things," said Mr Rob Thummel, a portfolio manager at Tortoise, a firm that manages roughly US$8 billion (S$10.9 billion) in energy-related assets. "Clearly, the oil price was expecting something bigger than this."

Despite Tuesday's rally, crude prices have dropped close to US$10 from earlier this month as the US signalled it may tap its reserves.

At a press conference addressing inflation, US President Biden said it is unacceptable for petrol supply companies to pocket the profit instead of passing on savings to consumers. Mr Biden reiterated that his administration will do what is necessary to lower petrol prices, without specifying steps.

"While our combined actions will not solve the problem of high gas (petrol) prices overnight, it will make a difference," said Mr Biden. "It will take time, but before long, you should see the price of gas drop where you fill up your tank."

When asked about the potential for a US export ban in the future, the administration suggested that all options are on the table.

RBC Capital Markets said the US believes it has the ability to release more oil from its reserves if prices rise further. The Biden administration wants to keep prices below US$80 "and believes it has the ability to do another release of a similar magnitude", RBC analysts wrote in a report on Tuesday.

Focus will now turn to how Opec 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-plus to increase oil production any faster, despite pressure from major consumers.

The US government was set to release its weekly inventory tally yesterday.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on November 25, 2021, with the headline 'Oil prices up 3% despite landmark coordinated move to tap reserves'. Subscribe