Oil Dips as U.S Taps China, Japan on Strategic Reserves Release

Oil Dips as U.S Taps China, Japan on Strategic Reserves Release

Oil dips again on Thursday after U.S President Biden reportedly asked major oil consumers, like China and Japan, India, South Korea, to consider a coordinated release of Strategic Reserves.

Beijing looks to be considering a proposal by the Biden administration to release its oil reserves on Thursday. International benchmark Brent crude was trading at $79.91 per barrel, representing a 1.13% fall after closing the previous session at $80.82 a barrel.

American benchmark West Texas Intermediate (WTI) was at $77.10 per barrel at the same time for a 1.62% drop after trade ended at $78.36 a barrel in the previous session.

Oil prices fell following news of a potential coordinated effort between the US and China, the world’s two largest economies, to tap strategic oil reserves, OANDA analyst Edward Moya said in an overnight Wednesday note.

The drop in oil prices also comes despite a mostly bullish EIA crude oil inventory report, with a surprise draw of 2.1 million barrels, lower production, and steady gasoline demand failing to trigger a recovery in prices, Moya said.

The 2.1-million-barrel draw countered data from the API of a 655,000-barrel build and a consensus estimate of a 1.2-million-barrel increase, according to Moya.

Inflationary pressures are causing investors to be nervous about the short-term growth outlook, which could soften crude demand, Moya said.

If the US and China do not reach a quick agreement on a coordinated reserve release, West Texas Intermediate crude prices should quickly recover to the $80 level, while a formal announcement could trigger further selling momentum that targets the $74 area, Moya noted.

Oil prices are under pressure

Brent settled 2.6% lower yesterday and at one stage, traded to its lowest levels since early October, according to ING Economics, saying this weakness has seen both Brent and WTI break below their 50-day moving averages.

This downward pressure has continued in early morning trading today. The catalyst for the move appears to be growing expectations of a release from the US Strategic Petroleum Reserve.

At the same time, reports that President Biden asked President Xi for China to tap its oil reserves, have meant the potential for a coordinated release, along with other key consumers.

In addition, given the rising price of gasoline at the pump, President Biden yesterday requested that the Federal Trade Commission look into potential anti-consumer behaviour by oil and gas companies.

It is this growing discontent amongst key consuming nations (particularly the US), which appears to be making market participants nervous, that we could see some form of action to bring oil prices lower. 

While a release from the SPR would only provide some short-term relief to the market, that may be all that is necessary, given the expectation that the global oil market could return to surplus as early as the first quarter in 2022.

Weekly numbers from the EIA yesterday showed that US commercial crude oil inventories fell by 2.1MMbbls over the last week, while the market had been expecting a build.

European gas prices and Asian spot LNG prices held up well yesterday, despite the weakness in the oil market. The strength in European gas prices continues to support the Asian LNG market, with the region having to compete for supply.

In the APAC region, Gorgon LNG’s 5.2mtpa train 1 was temporarily shut on 16 November, after a gas leak was discovered. The other two production trains (which have a similar capacity) at the facility, continue to operate as normal.

As the US moves to persuade China, Japan, South Korea and India to release strategic oil reserves, a concerted approach may have a greater impact on the oil market than a solo effort from the US, Commerzbank said in a Thursday note.

These potential strategic reserve releases are heightening pressure on oil prices, which fell further overnight after having closed trading at six-week lows on Wednesday, the bank noted.

Brent is trading below $80 per barrel and West Texas Intermediate is below $78, Commerzbank said. The market seems to have interpreted these data as increasing the possibility that strategic reserves will be released, Commerzbank said. #Oil Dips as U.S Taps China, Japan on Strategic Reserves Release

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