Emergency oil stockpile sales are like throwing deckchairs off the Titanic
The OPEC+ group’s caution about the pace of the unwinding of quotas was on show again at last week’s videoconference meeting.
There was no push to ‘leak’ extra crude to make up for members unable to lift production because of capacity issues, nor any attempt to boost output to counter possible losses from Russia and or Kazakhstan. We attribute this behavior to the stewardship exercised by the current Saudi Arabian Minister of Energy, Prince Abdul Aziz bin Salman, and, importantly, limited spare production capacity especially when compared to what we witnessed at the Organization of the Petroleum Exporting Countries conferences during the 1980s and 1990s.
The attempt by US President Joe Biden’s administration to lever down gasoline prices ahead of November’s mid-term elections was on display again last week, this time in the form of the largest ever non-emergency sale of US Strategic Petroleum Reserve stockpiles. The 180 million barrels of crude to be offered over a six-month period marks the third attempt in as many months to counter structurally bullish oil balance fundamentals. It was ironic that new taxes on oil producing companies were proposed at the same time as the sale.
Work we have previously published shows that oil prices rally during non-emergency sales of emergency stockpiles. The conclusion sounds counter-intuitive, but this self-defeating behavior is well demonstrated. Be that as it may, the conclusion has eluded those advising and advocating the ploy. Notably, no refining companies are currently unable to secure feedstock, underscoring the political nature of America’s sales.
There are a few key points we are compelled to share. First, it is not clear that the latest tranche of emergency stockpiles sales — actually, all of recent such sales — will be able to offset production losses related to Russia’s invasion.
There have been several figures thrown around in a bid to assess output losses tied to the invasion of Ukraine, but we have yet to see any credible data. Various cash market spreads suggest there has been a dislocation or disruption of Russian supply but, again, the volume is unknown. Should suggestions that three million barrels a day of Russia’s oil output will be shut-in from sanctions and self-imposed embargoes, the combined total of all emergency stockpile sales announced to date will fail to offset the losses — admittedly the duration of this forfeited production figures prominently in this accounting.
The other key point we are compelled to note is that OPEC could choose to reduce its production should emergency inventory sales threaten to cause commercial stocks to swell, which would pressure oil prices lower. We saw this in the fall of 2000 when former US President Bill Clinton’s administration sold 30 million barrels of SPR crude, the effect of which was more than offset by US crude imports falling 32 million barrels — US commercial crude stockpiles were actually lower after the SPR sale.
As for the outlook, we continue to circle back to our base case which forecasts the global oil balance to tighten this year on top of last year’s all-time record high inventory drawdown. Our forecast did not allow for, or count on, any unplanned supply outages from either OPEC or non-OPEC producers. So far, fundamentals are unfolding largely as expected but the potential losses tied to the Russian invasion of Ukraine raise a risk that oil balances will tighten faster and by more than what we were already forecasting.
• Michael Rothman is the president and 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