November 26, 2021 / 07:50 AM / by FDC Ltd / Header Image
Ahead of its meeting next week, The Organization of the Petroleum Exporting Countries, Russia and allies, together called OPEC+, has signaled to markets that it is willing to do 'whatever its takes' to keep prices within an ideal a range and maintain market share. This is coming on the heels of the US announcing plans to make good on its threat to tap its Strategic Petroleum Reserve (SPR) amid high oil and gasoline prices.
US President Joe Biden has been vocal in his call to OPEC to ramp up oil output as gasoline prices surge in response to higher oil prices. Higher gasoline prices have also played a major role in US inflation rising to a 31-year high of 6.2%. This is also particularly worrying for Biden as the 2022 midterm elections approach. Gasoline prices often directly correlate to voter support for the current administration. OPEC+'s response has been an emphatic "NO" leaving the US and other major oil importers (China, Japan, India, South Korea) with only the SDR card left to play.
The US now plans to release up to 70mb which, in theory, could further scramble the supply demand balance. The total volume of all planned SPR releases is expected to be around 100mb (approximately one day of global production). In reality, the release would transpire over several weeks, adding an extra 4-5mbpd to global daily production. Markets have been largely unperturbed by Biden's announcement, choosing instead to stick to what they already know about OPEC+'s willingness and capability to lower output and rebalance the oil market. Just last year, the alliance slashed its output sharply as demand vanished amid Covid-19 lockdowns.
OPEC+, particularly Saudi Arabia, sees the released crude as potentially swelling global supply and threatening to reduce prices. Oil prices have hovered near multiyear highs on the back of a global energy crunch. A resurgence of COVID cases in several European countries is triggering, or compelling countries to consider, fresh restrictions which could hamper economic activity and hurt the demand for oil. OPEC+ will meet on Dec. 1-2 to discuss their production plans for the following month and are likely to pause plans to provide the world with more crude to compensate for the increase in supply.
The current plan involves ramping up output by 400,000bpd each month from August through 2022 until pre-pandemic pumping levels are attained. Saudi Arabia and Russia will need to get other powerful members of the alliance, including the United Arab Emirates and Kuwait to buy into their "pause" strategy. These members have clashed with Riyadh in the past and markets will be looking out for a united front. A slower pace of supply increases from OPEC+ could drive oil prices higher and leave consumers (especially in the US) feeling the SPR crude release backfired.