Oil prices continue to slide as US releases oil from strategic reserves

Consuming nations are meeting to discuss how to bring additional supply to the market to curb soaring crude prices

Storage tanks at Marathon Petroleum's Los Angeles refinery. The US plans to release a million barrels of oil a day from its strategic reserve. Reuters
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Oi prices continued to fall on Friday, headed for the worst weekly loss in two years after the US decision to release the largest volume from the US Strategic Petroleum Reserve – 180 million barrels over the next six months.

Brent, the global benchmark for two thirds of the world's oil, was trading 0.88 per cent lower at $103.8 per barrel at 12.45pm UAE time on Friday. West Texas Intermediate, the gauge that tracks US crude, was 1.06 per cent weaker, trading at $99.22 a barrel.

Brent is still up about 50 per cent since the start of this year after falling from a 14-year high earlier this month when the benchmark nearly touched $140.

Crude prices that were already falling on Thursday in anticipation of the US move, weakened further after President Joe Biden's announcement to release oil stockpiles. President Biden faces the lowest approval rating of his presidency (40 per cent), according to the latest Reuters/Ipsos poll, stalled nuclear negotiations with Iran and the US seeking to control inflation that hit a 40-year high.

The move by the US is the third time the country has tapped into its strategic reserves in the past six months, following 50 million barrels released in November 2021 and 30 million barrels in March 2022 as part of the pledge by International Energy Agency members to unload 60 million barrels from emergency stocks to stabilise energy markets.

“The sheer velocity of this US SPR release is unprecedented," said Ehsan Khoman, head of emerging markets research at MUFG Bank, Japan's biggest lender.

"Theoretically, this would lower the amount of price-induced demand destruction – the only practical mechanism to rebalance markets – required. Practically, however, this release is in essence a one-off release of oil inventories and not a continuous stream of supply over the medium term and is dwarfed by the extraordinary magnitude of Russia’s export disruptions."

While the scope of the US announcement took markets by surprise, the SPR release will “not alleviate the structural supply deficit ... that in fact predates the Russia-Ukraine conflict”, Mr Khoman said.

In addition to the release of its stockpiles, the US is trying to co-ordinate its roll-out with other countries, which may add another 30 to 50 million barrels.

IEA member countries are meeting on Friday after the Paris-based agency last week said it could release more oil into the market “if needed” to tackle soaring prices. The IEA has so far committed to release 61.7 million barrels of oil, about 4 per cent of the group's total reserves.

“If history is any indication, strategic oil reserves have a short-term easing effect on oil prices, which is then followed by a rebound to higher levels, as the extra barrels are a quick fix, which doesn’t solve the longer-term supply gap,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

Opec+, the 23-member super group of producers led by Saudi Arabia and Russia, on Thursday stayed the course of incremental increases in global oil supply and said it will bring another 432,000 barrels per day of crude to the market in May.

"Continuing oil market fundamentals and the consensus on the outlook pointed to a well-balanced market, and that current volatility is not caused by fundamentals, but by ongoing geopolitical developments," according to a group statement.

The producers’ alliance has resisted calls from the US, its European allies and other oil importing nations to increase output as crude prices soar and has stuck to its agreed output increases so far.

Markets priced in Opec+'s 432,000 bpd production increase and the US SPR release should be enough to cap oil prices now unless the Eastern European situation deteriorates markedly, said Jeffrey Halley, a senior market analyst at Oanda.

“Conversely, if Venezuelan and/or Iranian oil is allowed to return to the official international market, in combination with Opec+ hikes and the SPR release, I would confidently say we have seen the highs in oil. I fully admit there are a lot of different variables there,” Mr Halley said.

“Overall, I still expect Brent to trade in a choppy $100 to $120 range, with WTI bouncing around in a $95 to $115 a barrel range. The US SPR and monthly Opec+ production hikes are [currently] balanced out by geopolitical tensions elsewhere."

Updated: May 30, 2023, 8:38 AM