Explained: How the release of SPR oil is more politics than economics

The move by a US-led group of oil-consuming countries to release strategic petroleum reserves (SPR) in a concerted manner has more to do with Washington’s domestic priorities rather than an attempt to cool oil prices since the volumes offered are only a little over 1 per cent of the average Organization of the Petroleum Exporting Countries (Opec) output. 

India has unwittingly got involved in Washington’s move to prop up US President Joe Biden’s sagging image before Senate polls next year, which may alienate key oil producers — Opec and Russia.

Crude oil prices, already at a seven-year high, rose after the US announced a plan to draw down as much as 50 million barrels (mn bbl) of crude oil from its SPR in the next several months in tandem with other oil-consuming nations, including China, Japan, South Korea, India, and the UK. 

India agreed to release 5 mn bbl of crude oil from its SPR at an unspecified time. China, Japan, and Korea are yet to announce a number, while the UK said companies can voluntarily release up to 1.5 mn bbl from reserves. 

Prices of front-month January Ice Brent and Nymex WTI crude futures contracts increased by $2.71/bbl and $2.1/bbl, respectively, from their settlements in the previous session after Tuesday’s news, according to the data from UK-based commodity market data provider Argus.  

Goldman Sachs has retained its $85/bbl Brent crude price forecast for this quarter. 

Barclays increased their crude oil price forecasts for next year, noting that the release of reserves will not affect prices since SPR is not a sustainable source of supply and the effect of such market intervention will only be temporary. 

The Brent crude January contract traded at over $79 bbl on November 22, even as the market was rife with news on the impending SPR release. Prices hardened to $82.5/bbl on Tuesday and are trading at above $82/bbl on Wednesday. 

A 70-80 mn bbl of coordinated reserve release over six months is around 400,000 bbl/day. That is a fraction of around 97 mn bbbl/day of global oil demand and Opec’s production of around 30 mn bbl/day.

Opec in a meeting this month with its oil-producing allies like Russia had reiterated its decision to increase output by 400,000 bbl/day every month in 2022. But Opec and its allies can now pause their output increase for a few months, citing demand concerns over a resurgence of the pandemic in western countries, negating SPR release, said analysts. 

The US in coordination with other International Energy Agency (IEA) members released 30.64 mn bbl of sweet crude, the second highest after Tuesday’s announcement, during the Libya crisis in 2011 to offset Libya’s production curtailment.

The 28 IEA members announced release of 60 mn bbl on June 23, 2011, or of 2 mn bbl/day in 30 days after the Libya unrest removed 132 mn bbl of light, sweet crude from the market by the end of May.

Brent was then trading at close to $130/bbl in May and after the IEA response, went down to as low around $105/bbl in late June before rebounding to around $120/bbl by August. 

IEA members had previously released reserves in a coordinated manner during Operation Desert Storm in 1990-91, following Iraq’s invasion of Kuwait, and Hurricane Katrina in 2005.

India seems a reluctant bedfellow in the US coalition. Earlier this month, Oil Minister Hardeep Puri, in a Bloomberg TV interview, vehemently opposed the release of oil from SPR, terming the strategy inappropriate to contain prices.

Typically, the IEA demands of its members, of which India is not, is to have an obligation to hold emergency oil stocks equivalent to at least 90 days of net oil imports. India will need over 350 mn bbl in reserves, including SPR and those held by oil companies, if it needs to meet 90 days of domestic demand — it carries less than 30 days of stocks overall.

Amrita Sen, chief oil analyst at London-based researcher Energy Aspects, said that the SPR release is a continuation of what China, India, Japan have been doing this year and is just repackaging existing SPR releases that would have happened anyway.