World crude oil markets crashed on Friday by more than 10 per cent. For the first time since late September, West Texas Intermediate, the U.S. crude, tumbled below $70 a barrel, while the global benchmark, Brent, slumped to less than $75 a barrel.
This crash wasn’t anticipated.
The relief didn’t just come from the co-ordinated release of crude oil from the strategic petroleum reserves (SPRs) of the major global consumers. The dip came as a new COVID-19 strain sparked fears of renewed lockdowns and the associated demand destruction.
To be fair, some see the co-ordinated release as too late and too little. The total volume to be released from the SPRs stands somewhere around 100 million barrels. That’s roughly equivalent to one day of total global requirement. And this volume is to be released in instalments over an extended period.
So at best, this could mean the release to be around four to five million barrels per day (bpd) from SPRs, analysts suggest. And this isn’t sufficient to tame the bull in the oil markets.
There’s growing speculation that when the Organization of Petroleum Exporting Countries and their allies in OPEC+ meet next on Dec. 2, they might respond strongly to the SPR releases. Media reports say the OPEC+ is leaning towards abandoning the plan for a modest production hike scheduled for January.
OPEC+ sources told Reuters that, to nullify the impact of the co-ordinated release from SPRs, the group might decide to add just 400,000 bpd as they previously agreed or even withhold this output increment. This would nullify the impact, if any, of the SPR release, analysts agree.
The U.S.-led move to arrange a co-ordinated release from the strategic reserves came after behind-the-scenes moves to push Saudi Arabia to agree to an output increase apparently failed.
According to Matthew Martin and Javier Blas reporting for Bloomberg, American envoys, first in private and then in public, spent weeks trying to convince the Saudis to pump more crude – and quickly. The diplomatic pressure was ultimately directed at a 36-year-old-man who can change the price of oil – and the fortunes of politicians in consuming nations – on a whim: the Saudi Crown Prince Mohammed bin Salman.
But the prince, the kingdom’s day-to-day ruler, didn’t budge despite the overtures from American diplomats. Prince Mohammed was more worried about oil’s supply-and-demand fundamentals than the political needs of the United States.
While U.S. President Joe Biden wanted cheaper gasoline, the prince had his own wish list, including something he hasn’t yet got from the current White House – access, the Bloomberg report underlined.
A lot of geopolitics are involved in this ongoing game. Higher oil prices have “strengthened Saudi Arabia’s position both financially and politically,” David Rundell, a former U.S. diplomat with decades of experience in the kingdom, told Bloomberg. “Mohammed Bin Salman’s position will become even more secure” after this episode, he emphasized.
“The U.S. has to offer something big to get the Saudis to change course – and that must include a bilateral meeting between Biden and MBS,” said Neil Quilliam, an associate fellow in the Middle East and North Africa program at the think-tank Chatham House, was quoted as saying.
The Paris-based International Energy Agency is openly accusing OPEC+ of not doing enough to tame oil prices. While lashing out at OPEC+, IEA executive director Fatih Birol told CNBC: “[A] factor I would like to underline that caused these high prices, is the position of some of the major oil and gas suppliers, and some of the countries did not take, in our view, a helpful position in this context. In fact, some of the key strains in today’s markets may be considered as artificial tightness … because in oil markets today we see close to six million barrels per day of spare production capacity lies with the key producers, OPEC+ countries.”
OPEC+ isn’t keen to tap those.
A new round of tug of war is very much in play.
“A new and unchartered type of price war is brewing in the oil market,” said Louise Dickson, senior oil markets analyst at Rystad Energy, in a research note.
And in the background, the new COVID strain seems to have come to the aid of the consuming nations. Now we just have to wait for the next move from OPEC+.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.
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