A drop in the bucket
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Oil prices jump after White House announces drawdown on strategic reserves
The Alaska North Slope crude price jumped Nov. 23, gaining $2.11 to close at $82.52 per barrel. West Texas Intermediate gained $1.75 to close at $78.50 and Brent gained $2.61 to close at $82.31.
The increase was the largest in two weeks, coming as the Biden Administration announced a 50 million barrel drawdown of the Strategic Petroleum Reserve in an attempt to lower oil prices. Analysts suggested that the market had been pricing in the possibility of a larger draw on the reserve.
The release of reserves will be taken in parallel with other major energy consuming nations, including China, India, Japan, Republic of Korea and the United Kingdom, the White House said in a Nov. 23 statement.
“This culminates weeks of consultations with countries around the world, and we are already seeing the effect of this work on oil prices,” the White House said. “Over the last several weeks as reports of this work became public, oil prices are down nearly 10%.”
Republican lawmakers said the SPR should not be tapped to offset bad policy.
“This is reckless; we must ensure the reserve is fully stocked and ready for true emergencies,” Rep. Don Young R-Alaska said in a Nov. 23 statement.
“Very frankly, we did not need to get to this point, and we are only here because the Administration has stifled American resource exploration and hamstrung our hardworking energy labor force at every turn,” Young said. “This is not a crisis necessitating a dip into our strategic oil reserves; rather, this is an emergency created purely by political malfeasance and broken promises.”
What will OPEC+ do?On Nov. 22, oil prices began a rally on the possibility that the Organization of the Petroleum Exporting Countries and its allied producing nations might decide at its Dec. 2 meeting to respond to reserve releases by trimming the size of a 400,000 barrel per day production increase planned for December.
ANS rose 87 cents Nov. 22 to close at $80.41, WTI rose 65 cents to close at $76.75, and Brent rose 81 cents to close at $79.70.
OPEC has not commented publicly on the inventory draws, but remarks by OPEC Secretary General, HE Mohammad Sanusi Barkindo at the Nov. 23 meeting of the OPEC Economic Commission Board indicated that the OPEC+ group would be proactive in response to new developments in the market.
“At the last Meeting on 4 November, (Declaration of Cooperation) partners reaffirmed their ongoing commitment to ensuring a stable and balanced oil market in the interests of producers and consumers, and in support of the ongoing global economic recovery,” Barkindo said, “They furthermore vowed to stay flexible, vigilant, proactive and transparent in addressing the large uncertainties and adapting nimbly to the current complex and ever-evolving market environment.”
Even if OPEC+ does not react, the power of strategic reserve draws to moderate prices is limited, and temporary. The U.S. release of 50 million barrels is enough to satisfy about one half of one day’s global oil demand. The entire U.S. SPR contains some 600 million barrels, enough to satisfy one month of domestic demand.
China may benefit mostChina has not yet announced the size of its corresponding withdrawal from its strategic reserves.
The country does not regularly publish the size of its crude reserves, but the National Bureau of Statistics said in 2017 that the national reserve, including some corporate stocks, stood at 280.7 million barrels by mid-2017. China is widely believed to have stockpiled a significant amount of crude oil when prices plunged in March and April 2020.
Wang Yongzhong, senior energy researcher with the Chinese Academy of Social Sciences, estimated that China’s crude reserve is equivalent to around 40-50 days of its imports, still far below the 90-day criteria set by the International Energy Administration, according to a Nov. 23 report in the South China Morning Post.
China bought 4.06 billion barrels of oil in 2020, a year-on-year increase of 7.3%. In 2020, it imported 73% of the oil it consumed.
So far during the pandemic, China appears to have stepped up its crude purchases when prices have fallen. If it remains true to form, the country may step up its crude buying if any significant price reductions are achieved from drawdowns of strategic reserves, making it rather than U.S. consumers the chief beneficiary of the exercise.
Alaska stands to benefit if China swoops in to take advantage of bargains that the extra crude on the market may bring.
If China steps up its purchases on the spot market, ANS crude prices would likely be supported as the Asian nation snaps up Pacific crude cargoes that may have otherwise competed with ANS on West Coast markets.