Emergency oil sales for non-emergencies: : A case of sandbags versus tsunamis

Emergency oil sales for non-emergencies: : A case of sandbags versus tsunamis

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If it was the hope of the Joe Biden administration and leaders of other large consuming nations for oil prices to sink after announcing a coordinated sale of oil from emergency inventories, well, oops. As we write this column the question most probably have is why did benchmark crude oil prices rally close to $3 per barrel after the announcement. We believe it reflected a combination of factors discussed below.
Firstly, while the Biden administration touted a roster of six countries participating in the emergency oil inventory sale, the actual volumes excluding those from the US are scant.

Japan’s initial reaction indicated to us it was cool to the idea and its 4.2 million barrels that look to be offered up for sale is a literal drop in the oil balance bucket. We see the UK’s 1.5 million barrel pledge as little more than a token, at best, which is also the case for India’s 5 million barrel slice. As we go to press neither Korea nor China have yet to offer up any figures for their respective contributions.

Secondly, the bulk of the emergency inventory release from the US is actually going to be an “exchange” meaning crude from the stockpile is borrowed by refiners and then paid back (in barrels) over a period of months. Essentially it amounts to a short-term loan of 32 million barrels.

The remainder of the US volume (18 million barrels) that is on sale that was already in place that is slated for congressional fundraising of various programs. What this means is that emergency stock sales effectively will be just 12 million barrels more than what we already allowed for in our oil balance forecast. Given the daily rate of world oil demand, the stockpile sale volume is inconsequential.

Thirdly, the volume of emergency stock sales will be fairly easy for the OPEC+ to offset if it so chooses. The next meeting will discuss delaying the already agreed to quota unwind.

The supply/demand aspects of that discussion will center on the anticipated time frame of planned emergency stock sales (for example, assuming all 60 million barrels of combined sales take place, a release that is spread out over two-to-four months is a different issue than sales spread over, say, 30 days).
Lastly and no less importantly, based on our supply/demand work, the emergency stockpile sale engineered by the US administration will fall woefully short of the incremental supply needed to prevent global inventories from drawing meaningfully during 2022.
We know that our oil balance forecast is out of consensus (this was the case for 2021 as well), but that noted we foresee global petroleum inventories being drawn down next year even with OPEC+ ramping to its capacity by the fourth quarter.
While noted in our last column, we are compelled to highlight again that emergency oil stockpile sales for non-emergencies historically see oil prices rally through the actual sale. We have every reason to expect this latest ploy will see the same effect.

• Michael Rothman is the president & founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.com

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