In-depth Analysis

The US Oil Conundrum

The price of oil in the US has become much more of a political conundrum than simply an issue of setting a realistic price for a commodity.  As the US economy rebuilds in the wake of Covid (or during a respite from Covid, we don’t know yet), WTI crude oil prices have risen to nearly twice the level they were at last winter. With domestic political pressure building over high oil prices at the pumps, President Biden decided to release 50 million barrels of oil from US reserves in the coming months. The White House was quick to point out that the release was coordinated with similar moves from other major users, particularly China.

At first glance, Biden’s move should ensure that the price of oil starts trending lower. But there are two potential hiccups in this particular plan. Firstly, others can play that game too. Biden has not released the oil stocks into a vacuum, in terms of the oil market. OPEC has long controlled the supply of oil from the Middle East, Africa and parts of South America and has carefully balanced this supply against the price of oil. Any sustained drop in prices is set to trigger a reaction in terms of output and exports.

Russia, which pumps more oil than Saudi Arabia, dances to its own tune. It has not been shy about using its natural resources to fight a few battles, as we have seen this winter when it effectively cut off gas to Germany because of a dispute over a pipeline. For the past five years Russia, Saudi Arabia and the rest of OPEC have increasingly coordinated their output to ensure that the price of oil is maintained at a certain level. OPEC Plus, the alliance of OPEC and Russia, will see Biden’s move as being part of a siege strategy – a question of who can last longer. How long can Biden keep releasing oil into the market to reduce prices while OPEC Plus withholds its oil to prop prices up? Biden is not short of oil, there are 605 million barrels in the US Strategic Petroleum Reserve, kept for exactly this kind of occasion, but he is pitching his reserves against OPEC, which produces 60% of all the oil traded internationally.

The other unpredictable element is China. Relations between China and the US are far from smooth at the moment, and although Biden indicated that he has support on the oil issue from China’s President Xi Jinping, Chinese sources have been quick to clarify that this will not be a straight-forward cooperation. China will ensure its own needs are met first and only then potentially look to help the US. And if and when it does, it may ask for political concessions in return, concessions the US may not want to make.

With so many political chips on the table, the price of oil will turn into a tag of war over the next few months. The release of the US strategic oil reserves is not the last of the politically motivated market decisions we will see this winter.

By ActivTrades Research Team

 

 

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