Opec Snub Leaves US With Empty Hands
The US has limited options to counter Opec-plus ignoring pleas by the White House to produce more oil and soften the price rally, while traders argue that some strategies, like releasing oil from strategic reserves, can backfire and further lift prices.
US officials say all options are on the table to keep domestic gasoline prices from rising further, as benchmark crude pushes back over $80 a barrel. But analysts point out that the US gripes with Opec only highlight the country's inability to impact oil prices in the short term.
As all recent US administrations have done, the Biden White House has pressured Opec to open the taps. But the group on Thursday stuck to its plan to add 400,000 barrels per day in December as it sees uncertain winter demand and inventories rising in the first half of 2022.
In a briefing with reporters on Thursday, White House Deputy Spokesperson Karine Jean-Pierre said that “this is not the end,” adding that US officials will continue to “have those conversations” with producer countries.
Opec-plus has some 5 million b/d of immediately available spare capacity but keeps the market tight to stay in control and prevent eroding its position of strength built during the recovery from the pandemic.
Release Oil
The US says it has considered releasing crude from its Strategic Petroleum Reserve (SPR), which holds 621 million bbl in caverns on the US Gulf Coast. But that runs against established rules that those stocks are to be used only in cases of supply disruptions.
US producers, who are reaping the benefits from higher oil prices, balk at market intervention that would lower oil prices.
Analysts argue that SPR sales without any supply disruption would only emphasize supply tightness and that the market would see such a move as "desperation" and a signal to further bid up prices.
Traders point out that producers have more muscle and a much bigger market impact than the release of oil from limited inventories.
US President Joe Biden acknowledged in October that releasing oil alone would not significantly impact the price consumers pay at the pump — the White House's main concern.
“I could go in the petroleum reserve and take out and probably reduce the price of (gasoline) maybe 18¢ or so a gallon. It's still going to be above three bucks,” he said.
The US is already reducing volumes held in the SPR with domestic production capacity increasing sharply over the last decade, lowering the need for high emergency stocks.
Make It a Loan
The US Department of Energy (DOE) can also do limited “exchanges” in which it releases to refiners oil that is later replaced.
The agency did that as recently as September, in the wake of hurricane disruptions. The threshold for action on an exchange is lower, too, making it a somewhat easier tool to reach for.
The DOE also has mandatory releases from strategic stocks to contemplate.
The US Congress has approved sales that would lower the stocks by 300 million bbl over the next decade. Since mid-September, SPR sales have run at an average of 1.1 million bbl per week for a total of 9 million bbl. Since the start of 2021, the US has sold 26 million bbl from the caverns, according to Energy Information Administration (EIA) data.
The DOE has authority on timing for these releases, meaning it could conduct the sales at a time when it believes the market is more likely to be tight — even if market observers argue those sales are already priced in.
Downstream Plays
For the Biden administration, the focus is on prices at the pump, which have been above the politically sensitive $3/gallon level since May.
Independent refiners are again pushing for a change they have long sought to the renewable fuel standard (RFS) program, which requires specific volumes of biofuels blended into the nation’s gasoline.
The price for compliance credits — known as RINs — for that program have shot up over the past year. Refining sources say adjusting the required volumes or offering some sort of temporary relief from complying with the program could directly impact the price of gasoline.
However, doing so could be politically complicated for the administration because of the perception that it would be undercutting a market for renewable biofuels.
And the political complexity of the program — lawmakers from farming states and oil states alike take a keen interest in it — mean that decision-making has been pushed back as the White House tries to deal with the contentious infrastructure and spending programs that are its main priorities.
Limit Trade
Another option the US would have is to limit imports or exports of crude and refined products — six years after the Obama Administration lifted the ban on crude exports.
While US Energy Secretary Jennifer Granholm acknowledged the US has the ability to limit exports, there is intense skepticism, including from those in government, about whether such an action would actually serve to lower the crude prices that are the main driver of gasoline prices, since doing so would create dislocations in the market.
Limiting oil flows would impact either domestic producers or refiners and further dent the reputation of an administration that needs to balance calls for a low-carbon future with complaints about expensive short-term gasoline prices.
Such a move would “be a political minefield, with intense backlash in energy-producing states, where producers and coastal refineries want export operations,” notes the Center for Strategic and International Studies’ Ben Cahill.
In August, the US was again a net exporter of petroleum, a signal that domestic demand can be more than met by domestic production of oil, natural gas liquids and biofuels.
Scaremongering
Like the US, India and Japan have also been calling on Opec-plus to push more oil into the market to keep the prices of refined products in check.
But Saudi Arabia — Opec's de facto leader — says consumers are calling on the wrong party. The world is not short of crude, Saudi Oil Minister Prince Abdulaziz bin Salman says. It's short of oil products.
During an October industry event, Prince Abdulaziz said: “Unfortunately, for the first time, we see our role extremely limited. Why? Because the issue is not availability of crude oil.”
Prince Abdulaziz called rising prices the result of "scaremongering" over a cold winter and the natural gas prices that boost demand for refined products.