It’s never easy to separate petro-economics from petro-politics. Nevertheless, let’s take a closer look at this week’s rare move by a clutch of major oil-consuming nations to release stockpiles of crude held in reserve.

What’s happening?

The United States confirmed on Tuesday that it is releasing some 50mln barrels of crude oil, from national reserves. There are, of course, caveats.

Some 32mln are effectively ‘on loan’ and will be delivered into the market via oil companies over the next several months, and the other 18mln barrels were already earmarked for sale to boost budgets in Washington.

At the same time, other oil-consuming nations, including Japan, India and Britain, also committed to releasing some of their crude reserves. These are much lower commitments in comparison, and, in some cases symbolic more than anything.

China had been rumoured to be involved beforehand but are presently described by economists as non-comital.

In all, the amount of crude being directed into the market amounts only to a couple of days’ worth of demand.

The news underwhelmed.

Crude prices in fact rose in the wake of the announcement as reality failed to match expectations among oil traders.

What is a strategic oil reserve?

It is almost as simple and straightforward as it sounds – it is a physical stockpile of oil reserves held by nations for use in the event of an emergency or major conflict.

Some 605mln barrels of worth of crude is believed to be in the US strategic reserve, which is held in a series of caverns in Texas and Louisiana. It’s estimated that the reserve could sustain the United States for ‘several weeks’.

America’s role in oil market

The United States is the world’s biggest oil producer, flowing in the order of 18mln barrels per day.

A lot of that crude production relies on oil extracted from shale, which comes at a higher cost compared to high-volume conventional reservoirs – albeit operations offshore in the Gulf of Mexico also contribute significantly.

America is at the same time the world’s thirstiest oil consumer with demand estimated at close to 20mln barrels per day for 2021 (about 20% of the world’s demand), according to the US Energy Information Administration (EIA).

Shale has, in recent decades, meant that the United States has become less reliant on foreign imports of crude, and, indeed, America was recently and briefly a net exporter of crude.

Tighter margins on shale mean that the economics of the United States positioning in the global market is particularly sensitive to crude prices. When prices are particularly high, the US is self-sustaining and can even throw off excess barrels into the export market.

Lower prices mean fewer shale operations are viable and the US swings deeper into dependency on foreign oil.

Crude dynamics

Russia is the second largest oil producing country, spewing nearly 11mln barrels of the black stuff per day. Like America, Russia has its own substantial thirst for oil (3mln-4mln barrels per day). But, more significantly, its balance of trade is heavily weighted to hydrocarbons.

Strategically, for Russia, maintaining prices at a certain level is particularly important.

Elsewhere, Saudi Arabia is the third largest producer at around 9.5mln barrels.

After that, a clutch of states in the Middle East make up most of the other entries in the ‘top 10’ list – Iraq, the UAE, Kuwait and Iran together contribute something like 12.5mln barrels per day.

Canada produces some 4mln barrels per day and Brazil pumps more than 2mln barrels a day.

China directly produces close to 4mln barrels. Meanwhile, state-owned Chinese companies such as CNOOC – the China National Offshore Oil Company – have invested heavily in oil projects around the world (in Africa and South America particularly). So, in a practical sense China exercises control of more oil than its domestic product.

China is, predictably, the world’s second largest consumer of oil using around 13mln barrels a day (about 13% of world demand) followed by India and Japan which respectively make up 4.6% and 4.1% of demand.

Why Saudi Arabia and OPEC matter

OPEC is a cartel and it is a decisive price setter in the crude market.

A clue as to the reason for its influence is in the acronym. It is the Organization of the Petroleum EXPORTING Countries.

Saudi Arabia is the most influential of OPEC’s thirteen member states because, as we’ve mentioned, it produces most. In all the members are: Saudi Arabia, Iraq, UAE, Kuwait, Iran, Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria and Venezuela.

What these countries have in common is that they produce far more oil than they consume.

They benefit from higher oil prices without the burden of high industrial demand. To one degree or another they have an abundance of supply and, collectively, they can adjust output quotas and move crude prices.

Saudi Arabia is especially powerful among the group as its production base is both low-cost and prolific (in other words, it produces a lot of cheap oil). The result is that Saudi Arabia is the least constrained and least encumbered of the major players in the oil market.

Boosted by the support of the other OPEC members, in addition to Russia in the current OPEC+ arrangement, the group of producers has its hand on the wheel.

What’s next?

Well, the group of oil consumers – USA et al – made what amounts to a symbolic resistance with their release of reserves.

In all, the extra crude will amount to just a couple of days supply. ‘A small drop in the ocean’ is how one oil market commentator put it.

OPEC will meet next on December 2. And whilst it remains to be seen how it will move a number of voices have begun to build narrative.

The UAE oil minister is quoted by Reuters saying he sees “no logic” for the lifting of supply into global markets.

Earlier this week, when the release of US crude reserves was speculated but not confirmed, it was suggested that OPEC could respond by pulling some of its volumes out of the market – to bolster further support under prices.

John Kilduff, a New York based trader quoted by Reuters, reckoned the reserves release signalled that “the consuming nations are not going to get pushed around anymore”. And that’s a comforting sentiment for those with a cautious eye on inflation in the West. But more likely it will shortly look like a bark without bite.

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