Tue, August 16, 2022


Symbolic, or good for the economy? Views on Strategic Petroleum Reserve release

President Joe Biden on Thursday (March 31) launched the largest release ever from the U.S. emergency oil reserve and challenged oil companies to drill more in an attempt to bring down gasoline prices that have soared during Russia's war with Ukraine.

The announcement comes as part of a broad effort by Biden to tackle raging inflation that has hurt U.S. consumers and threatens Biden's fellow Democrats as they seek to maintain control of Congress in the November elections.

Starting in May, the United States will release 1 million barrels per day (bpd) of crude oil for six months from the Strategic Petroleum Reserve (SPR), he said.

Analysts Reuters spoke with had mixed reactions to the news.

"Symbolically, good idea, it had some impact on the price of the futures today, and that's either good or bad, depending on which side of the market you may be speculating on. But in terms of the big supply-demand function? No, it's not terribly important. Symbolic? Yes. Substantive. Much less so," said George Ball, Chairman of Sanders Morris Harris. "Although they're much derided, the state gasoline tax holidays actually do a great deal more for the driver, for the consumer, for the public than what the president announced today."

"Our belief is that it will be beneficial to consumers because now we will see a reduction in gasoline prices. It should be beneficial to GDP growth because, for every ten dollar increase in oil prices on a prolonged basis, it takes off 20 basis points or one-fifth of one per cent of real GDP. And that works in reverse, too," said CFRA Research's Chief Investment Strategist Sam Stovall.

Biden's 180 million-barrel release is equivalent to about two days of global demand and marks the third time Washington has tapped the Strategic Petroleum Reserve in the past six months.

It will more than cover oil exports to the United States from Russia, which Biden banned this month. Russia typically produces about 10% of the world's crude, but only accounts for 8% of U.S. liquid fuel imports.

But the release will fall short of a loss of about 3 million bpd of Russian oil which the International Energy Agency estimates will be lost to global markets amid Western sanctions and as global buyers avoid the oil.

Meanwhile, Russian President Vladimir Putin is demanding foreign buyers pay for Russian gas in roubles from Friday (April 1) or else have their supplies cut, a move European capitals rejected.

Putin's move, via a decree signed on Thursday (March 31), leaves Europe facing the prospect of losing more than a third of its gas supply. Germany, the most heavily reliant on Russia, has already activated an emergency plan that could lead to rationing in Europe's biggest economy.

"European countries have a short term problem. They import something like 155 billion cubic feet of gas from Russia every year, and that can't be made up by liquid national gas or other supplies from the US or elsewhere over the very short term. So they've got a big current dependency problem that over the long term is is almost certainly going to cause them to seek alternative sources. The U.S. can supply, for example, much of the LNG needs to go to Europe to substitute for Russia. But it will take us 10 years to build the production and the export capacity to do that. In the short term, a big problem. Longer-term, it may actually end up kicking Russia in its ass by what they're demanding today," Ball said.

It was not immediately clear whether in practice there might be a way for foreign firms to continue payment without using roubles, which the European Union and G7 group of states have ruled out.

A source told Reuters that payments for gas delivered in April on some contracts started in the second half of April and May for others, suggesting the taps might not be turned off immediately.

Published : April 01, 2022

By : Reuters