The release of oil from emergency reserves by International Energy Agency member countries is expected to ease some market tightness, but will not fix the industry's "structural imbalance”, according to a report by investment bank UBS.
Last week, IEA countries, which include the US, most of Europe, Japan, Australia and others, agreed to release a total of 120 million barrels of oil from their emergency stockpile (up from the 62.7 million they pledged in March) to tackle soaring oil prices after Russia’s military offensive in Ukraine. Half of the total amount will come from the US and the rest from other members.
This is on top of the 120 million barrels that the US plans to release from its Strategic Petroleum Reserve, which will bring total additional supply to the market to 240 million barrels worldwide.
“We are reducing our June Brent forecast by $10 per barrel to $115 per barrel. With the US releasing 180 million barrels and other OECD [Organisation for Economic Co-operation and Development] countries releasing 60 million barrels over the next six months, some of the market tightness caused by the self-sanctioning of Russian crude buyers – either in fear of future sanctions or for reputational reasons – should ease,” Giovanni Staunovo, commodity strategist at UBS, said on Monday.
But the release of the reserves will not fix the "structural imbalance resulting from years of underinvestment" in the oil industry as demand for crude continues to pick up in the global economic recovery, he said.
Total investment in the upstream sector of the oil and gas sector fell 23 per cent below pre-coronavirus levels to $341 billion in 2021 while oil demand continued to rise globally, according to a recent report by the International Energy Forum and IHS Markit.
Zurich-based UBS raised its December 2022 and March 2023 forecasts by $10 per barrel to $115 per barrel on the back of higher demand.
"The impact of high prices on oil demand should be lessened by fuel subsidies from governments to help consumers, the reopening of economies from the pandemic and elevated household savings," Mr Staunovo said.
"A likely refilling of the strategic oil inventories in some OECD countries next year should keep the oil market tight in 2023."
Brent, the global benchmark for two thirds of the world's oil, was trading 1.42 per cent lower at $101.32 per barrel at 12.16pm UAE time on Monday, while West Texas Intermediate, the gauge that tracks US crude, was down 1.55 per cent at $96.74 per barrel.
