“An Unprecedented Coordinated Effort” to Contain Oil Prices: Why Hasn’t the Anti-OPEC Plan Worked Yet?

Published:

Nov 24, 2021 15:07 GMT

The announcement of the measure, aimed at mitigating the energy crisis, caused a rise in oil prices.

With a view to containing the energy crisis that has been gripping the world in recent months, the US announced on Tuesday the decision to release part of the country’s strategic oil reserve, a measure joined by Japan, China, the India, South Korea and the United Kingdom. However, the negative market reaction to the joint initiative, described by Bloomberg as an “unprecedented coordinated effort by the world’s largest oil consumers,” called into question its actual effectiveness.

According to the White House, President Joe Biden ordered the removal of 50 million barrels of crude of the reserve “to solve the problem of the supply”. For its part, the Government of India announced that it will release about 5 million barrels of oil, while London has promised to allow its private sector to release 1.5 million barrels. Meanwhile, Tokyo also stated that it will release oil from its reserve for the first time without specifying the number of barrels in question.

Reuters: US calls on China, Japan and other countries to release their oil reserves in attempt to lower world energy prices

In Biden’s words, the measure “will make a difference” in the energy market. “It will take time but soon they will see that gasoline prices are falling when they fill their tank. And in the long term we will reduce our dependence on oil while we move to clean energy,” said the US president.

As reported by Bloomberg, the measure comes as a result of the refusal of the member countries of the Organization of Petroleum Exporting Countries (OPEC) and its allies, to significantly increase production.

Counterproductive result

However, the announcement of the measure, aimed at lowering oil prices, was followed by a counterproductive effect. The price of the futures contract for WTI brand oil with January supply began to grow to reach 79.18 dollars per barrel this Wednesday, although it fell to its current level of about $ 78, according to data from the London stock exchange ICE.

In parallel, futures prices for Brent with supply in January also experienced a rise this Wednesday until 82.96 dollars per barrel and subsequently settled at around $ 82.

Meanwhile, the British investment bank Barclays oil price forecasts increased this Tuesday per barrel at $ 3, up to $ 77 and $ 80 for Brent and WTI, respectively, according to Reuters. “We think that the Strategic Petroleum Reserves they are not a sustainable source of supply and the effects of this intervention in the market will only be temporary, “reads the bank’s statement.

Supply or policy emergency?

"A structurally strong cycle": Experts predict oil prices to remain high for years to come

Some experts were also reluctant to the initiative given its temporary nature.

In particular, former US Secretary of Energy Dan Brouillette, in comments to CNBC, struck out as “error” the release of oil by Washington.

“I really think it’s a bad political decision. Of that there is no doubt “, affirmed when remembering that the Strategic Petroleum Reserve is destined to protect to the citizens of interruptions of supplies.” It is not a supply emergency and the only emergency that I can […] see in this case is a political emergency“Brouillette opined.

According to the former US Secretary of Energy, the decision to make use of the strategic reserve to “counterattack” OPEC is a “wrong approach” which must be replaced by increased production.

“A day of global demand”

Schork Report analyst Stephen Schork expressed a similar view to CNBC, stating that the strategic reserve exists solely to mitigate unforeseen short-term supply disruptions. In this way, he shared his concerns that the price of crude Keep growing.

"A structurally strong cycle": Experts predict oil prices to remain high for years to come

“There is a considerable number of bets that we will see [un precio de] $ 100 a barrel, “Schork said.

On the other hand, he pointed out that the amount of oil expected to be released is insufficient to change the situation. “We are talking about 50 million barrels from the US, potentially another 50 from our partners. It is 100 million barrels of oil: it is a day of global demand for crude oil,” explained the analyst.

“Signal” for OPEC +?

In addition, according to the experts of the Russian investment bank VTB Capital, the next important event for the energy market will be the meeting of the OPEC + alliance, which will be held on December 2, although there are no indications that the organization will change the current supply policy in response to Washington’s decision.

Meanwhile, according to John Kilduff, partner of Again Capital LLC, quoted by Reuters, the measure “sends a signal to OPEC +” to modify production volumes.

On the other hand, according to Eurasia Group analysts, competing actions “they will not ease the pressure on consumers or provide the necessary stability to producers to ensure a stable and reliable supply. “

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