Oil climbs past US$80 after 'drop in the ocean' reserve release

BEARS have no hold on crude - for now, at least.

Brent, the global benchmark, broke above the US$80 per barrel mark in Asia's trading session on Wednesday (Nov 24), snubbing a coordinated release of oil reserves led by the US into domestic markets.

Disappointment over the extent of the overall release and continued bursting demand for energy led by an economic rebound from the pandemic kept crude benchmarks sharply higher, with pundits expecting prices to remain within a "comfortable range" of US$70 to US$90 a barrel.

Next on oil traders' radar is a meeting among Opec+ - the alliance between the Organization of the Petroleum Exporting Countries and other key oil producers such as Russia - a week from now on whether or not they will retaliate to the reserve release. Will the cartel, now seemingly less incentivised, decide to halt or delay output hikes is the big question.

"The coordinated release was viewed to have only a short-lived effect as years of declining investment and a strong global recovery from the Covid-19 pandemic suggested a stronger response was needed to cool prices," remarked Avtar Sandu, senior manager, commodities at Phillip Futures in Singapore, in a note.

US President Joe Biden announced a plan on Tuesday (Nov 23) to release oil from the Strategic Petroleum Reserve (SPR), in coordination with major oil consumers China, India, Japan, South Korea and the UK to cool surging petrol prices ahead of the holiday season. The world's largest economy said it will release 50 million barrels from its crude oil reserves with smaller contributions from other nations following weeks of talks to tackle the tight oil supply as countries rebound from the pandemic destruction and energy demand soars.

Together with the other nations, a release of some 70 million to 80 million barrels will be spread over several months.

It's a "drop in the ocean", said a Goldman Sachs analyst. "On our pricing model, such a release would be worth less than US$2 a barrel, significantly less than the US$8 a barrel sell-off that occurred since late October," the bank said in a note, adding that it was less than the larger 100 million barrels the market has been pricing in.

Global oil demand fell to 91 million barrels per day in 2020 owing to mobility curbs and lockdowns to fight the pandemic. This year, it is projected to bounce back to above the key level of 100 million barrels per day.

Biden's move is also deemed strategic as inflation concerns could become a hot button topic in the US mid-term elections.

"The SPR release story, whether by the US and/or other nations, appears to be losing momentum. In the bigger picture, the amounts allowable by law to be released are only enough to temporarily cap prices," said Oanda's Asia-Pacific senior market analyst Jeffrey Halley.

Brent rose 3.50 per cent to US$82.25 a barrel while the US benchmark West Texas Intermediate (WTI) advanced 2.65 per cent to US$78.50 a barrel, following the announcement on the unprecedented coordinated release.

"Sell the rumour, buy the news" may have also prompted the rally as oil prices had dropped to a 7-week low on Monday (Nov 22) on expectations of more barrels coming into the markets. By around 2 pm on Wednesday in Asia, Brent and WTI were higher at US$82.60 and US$78.87 respectively.

The outcome of next Thursday's (Dec 2) gathering of the petro-nations is significant. The group has said it would not hesitate to respond to reserve releases. The latest development may draw the ire of the cartel, said TD Securities, describing the unwinding of the Opec+ group's "extraordinary deal remains crucial to consensus expectations of a global surplus for 2022".

Even so, there are doubts over the group's effective spare capacity owing to among other factors, a decade of under-investment. This could suggest Opec+'s ability to raise production aggressively, even if it wanted to, may be limited.

"Considering the group's limited effective spare capacity, along with the potential to reduce increases amid coordinated strategic reserve releases, there could very well be fewer barrels than the market expects, leaving upside risk for crude oil prices in 2022," said TD Securities.

Halley added: "With speculative positioning somewhat more balanced, international travel reopening and lifting fuel demand, and with Opec+ constraints in mind, any further sell-offs are likely to be short term in nature and not sustained.

"Only Europe can throw a spanner in the works (lockdown concerns may cap oil's upside in the short term) and if the Northern Hemisphere winter is a cold one, all bearish bets should be off."