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Oil prices rise despite release of reserves: Here’s why

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The Biden administration announced Tuesday the US will release 50 million barrels of oil from the Strategic Petroleum Reserve (SPR) in hopes of lowering the cost of gasoline as drivers face the highest prices in years. The White House said the release will be taken in parallel with other major energy consuming nations including China, India, Japan, Republic of Korea and the UK.

On Tuesday afternoon oil futures were up across the board, West Texas Intermediate was selling for $78.65 for December deliveries, up nearly 2.5%. Brent crude rose 3.3% to $82.32 and reformulated blendstock for oxygenate blending (RBOB) gasoline, was up 2.2% to $2.31 per gallon.

Gasoline prices have increased steadily over the last year. Pump prices are up 61% from this time last year, with regular unleaded selling last week for a national average of $3.40 a gallon, the US Energy Department reported.

The American Automobile Association (AAA) notes the price of crude oil comprises 50%–60% of the retail price of gasoline, “so a lower oil price should translate into better gasoline prices for drivers,” said AAA spokesperson Andrew Gross. He noted any relief in gasoline prices may be temporary “until global oil production ramps back up to pre-pandemic levels.”

Tapping into the SPR ends weeks of speculation

“Today’s announcement reflects the President’s commitment to do everything in his power to bring down costs for the American people and continue our strong economic recovery,” the White House said in a statement. “At the same time, the Administration remains committed to the President’s ambitious clean energy goals.”

Biden’s announcement goes against domestic oil producers, with the Independent Petroleum Association of America denouncing opening the SPR in this instance as a way to “manipulate” the market.

The SPR

The SPR currently has more than 600 million barrels stored, which is a decrease of 50 million from last summer, which was released in accordance to enacted legislation, Andrew Lipow, President of Lipow Oil Associates told Capital.com

“The 50 million barrels release is divided into two parts: there is an exchange of 32 million barrels and a sale of 18 million barrels,” he explained.

The exchange is a loan of crude oil, Lipow said, adding the crude oil must be received between January and April of next year, and paid back sometime between 2022 and 2024.

“For example, the way the programme works is if you receive one barrel of oil in January of 2022, you might have to return 1.2 barrels in December 2023 because oil is worth much more in January of next year than it is in December of 2023. So, this part of the release does not get more oil out of the ground, it just moves supply into the near term,” he said.

Congressional approval
Congress has already approved the 18-million-barrel sale as part of deficit decrease legislation. The oil market anticipated the 18 million barrels sale anyway.

“Since refiners have already bought their oil supplies for December, it is unlikely that this sale will have any supply impact on the market until January,” Lipow explained.

OPEC+

With the USA, China, Japan, South Korea and India all expected to announce releases from their respective Strategic Petroleum Reserves, the next move is up to OPEC+.

Lipow said he is not expecting OPEC+ cartel to budge on its increase production schedule.

“I expect that they will stick to their program of restoring 400,000 barrels per day of production each month over the next nine months. In fact, while they will continue with their program, they simply will not be able to restore all the production that they would like because countries like Nigeria and Angola simply have not invested to maintain their production levels,” he said.

In a tweet, OPEC said it will monitor developments related to the release of oil from strategic reserves by certain countries and that a global surplus could materalise sooner than anticipated in the first of second quarter of next year.

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Author: Capital
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