How to calm the price of a barrel of oil and replace Russian crude? By supplying the market with barrels from stocks, the OECD countries responded on April 1 under the auspices of the International Energy Agency (IEA), which advises them on energy policy. On Thursday evening, the agency specified the details of the intervention. Of the 240 million barrels to be mobilized by 19 countries, 180 million will come from the United States, as Joe Biden announced last month. In reality, of the 120 million barrels mobilized under the IEA agreement, the United States supplies about 60 million barrels, already counted in the 180 million that Joe Biden has announced, and the rest is mainly supplied by the Japan (15 million), South Korea (7.5 million), Germany (6.5 million), France (6 million), Italy (5 million), United Kingdom (4.4 million barrels), Spain (4 million) . By March, IEA member countries had already put 62.7 million barrels on the market, 30 million of which were supplied by the United States.
2.4 days worldwide usage
However, this volume on the scale of the planet’s needs remains modest. 240 million barrels represents 2.4 days of global oil consumption in 2022 and 5.2 days of consumption by OECD member countries.
Washington, for its part, has provided the precise terms of the 180 million barrels it will unsupply. “The first 90 million barrels will be released between May and July, via two sales announcements totaling 70 million barrels, and 20 million barrels already scheduled for May 2022. The remaining 90 million barrels will be released between August and October 2022.”says the US Department of Energy.
These initiatives aim to prevent a price increase after the US embargo on Russian oil exports, pending that of the Europeans, who are currently divided on the issue. So oil is still being supplied to the Old Continent.
On Thursday evening, however, investors welcomed the initiative. The price of a barrel of Brent on the benchmark contract has fallen below $100, after falling to around $118 in late March in the last few days since its last peak. The WTI barrel, quoted above $95, has fallen by about $17 in value since its highs at the end of March.
But the peace may be short-lived. Indeed, Russia’s marginalization in the global economy under the sanctions will cause a shock to the oil supply (not to mention natural gas and thermal coal). However, although the country is the world’s third largest producer of crude oil, it is the world’s largest exporter, according to the IEA, with 5 million barrels per day (mbd) or 12% of trade. 60% of international sales go to Europe and 20% to China. At least, before the invasion of Ukraine.
Tensions in the diesel market
To this we must add that we do not consume crude oil directly, but refined products. However, Russia occupies a key position in these markets. At 2.85 mbd, it accounts for 15% of international trade in intermediate petroleum products. Today, not only the supply of crude oil, but also that of diesel, the most widely used fuel in the world, is under pressure.
This explains why, despite the embargo imposed by the United States on March 8, Russian deliveries of petroleum products continued to climb to 100,000 barrels per day in the week of March 21† However, in the week from March 28 to April 1, they fell to zero, data from the Energy Information Agency (EIA) shows.
On the other hand, the debate is still going on within the European Union. The new sanctions package mentions coal, but at this stage oil and natural gas are excluded. The European Parliament has voted in favor of this hardening by a large majority and the President of the European Council, Charles Michel, also advocates an embargo that will be extended to all hydrocarbons. But some governments, led by Germany, are holding back because they are too dependent on Russian gas and oil, and have no short-term alternatives. Viktor Orban, the prime minister of Hungary, has already announced that he will veto a decision that requires the unanimity of the 27 member states.
Meanwhile, many analysts are skeptical about the effectiveness of destocking to buy enough time to find alternatives. Joe Biden announced that US production would increase by 1mbd by the end of the year. The US oil sector has been accused for weeks by elected left-wing Democrats to take advantage of high oil prices and not play the game. “The industry faces high cost inflation, labor shortages due to three recessions in 12 years, shortages of oil rigs, fracturing fluids, steel pipes and other equipment and materials.”Scott Sheffield, president of Pioneer Natural Resources, one of the largest independent producers of oil and gas in the United States, was interviewed by the Wall Street Journal. “We can’t go faster”he warned.
An operation that only shifts the problem
Moreover, this destocking, no matter how large, only shifts the problem. At 1.5 billion barrels, global oil inventories fell to their lowest level since 2014, the IEA said. Since the information is already integrated into current prices by the markets, a further decline in these inventories is an additional factor in price increases. Especially since sooner or later it will be necessary to replenish these spent barrels, which will accentuate purchases and thus support prices.
Another effect is that the operation removes pressure on OPEC to increase production, as regularly requested by the White House. The cartel and its partnership with Russia and other exporting countries through OPEC+ refuse any substantial increase in their extractions, even if they increase their supply by 400,000 barrels per day each month.
There are two reasons for this. The first is technical, OPEC+ does not meet its official quota. “The 13 OPEC members have increased production by 60,000 bpd (between February and March) 28.73 mbd, but this was offset by the 160,000 bpd drop in the 9 Allies bloc (from OPEC+), which pumped 13.91 mbd”notes in an S&P Global Commodity Insights note, which calculates that the gap between OPEC+’s actual production and its quota has now reached the record 1.24 mbd, “Increasing doubts about the group’s ability to meet global demand growth, which several experts say will return to pre-pandemic levels by 2022”†
The second is political, OPEC+ is based on the relationship between Saudi Arabia and Russia, the two heavyweights. However, this is solid, in the name of well-understood interests. Because today OPEC+ members benefit from the ideal combination that combines maximum market shares with high prices.
All these reasons together show that the latitude for western countries is limited and that the comparison is a puzzle.
Contradictory order
In a vicious editorial, the Wall Street Journal also pointed to Joe Biden’s contradictory order: The White House underlined on Thursday that it wants an ‘immediate increase in supply’ (oil)” while accelerating the “energy transition””, in other words, it is asking the help of the oil companies that it promises to make disappear. Ironically, the US business paper also noted that the Biden administration today courted Venezuela and Iran to increase world production, two countries on which the United States has imposed sanctions on exports of… oil.
Finally, it is the paradox of the situation created by Russia’s invasion of Ukraine. The West wants more oil today without tomorrow.
