Oil prices recover as bullish signs return with a vengeance after OPEC+ meeting
When the market saw oil prices fall after last week’s OPEC+ meeting most observers knew this was an exaggerated reaction and the expectation was that prices would quickly jump back as there was no surprise to justify the drop.
In fact, the global oil market conditions through year-end became more bullish since last week’s OPEC+ meeting, with signs of even tighter oil balances than what traders had priced in a week ago.
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Biden’s $1 trillion infrastructure bill which just passed through congress is a super-spending initiative which will definitely help oil demand growth, and it also comes at a time when the US is pushing OPEC+ to produce more oil and relieve prices. This US infrastructure bill screams bullish for oil.
Meanwhile in China, despite new Covid-19 infections, exports recorded a surprise growth last month and this is a strong signal of healthy industrial activity in one of the world’s top oil consumers.
Saudi Aramco’s decision to boost crude selling prices to Asia came as the cherry on the cake for bullish traders at the end of last week, and it was a move that could only accelerate the positive price reaction this Monday.
The big unknown is whether economies can achieve growth amid the current high price environment, or potentially in an even higher price scenario.
If the US doesn’t get OPEC+ to respond to its pledge for more output, it has its own arsenal of tools to deploy to battle high prices of refined oil products.
We could see a short-term bump of strategic petroleum reserves, export bans on particular products during the energy crunch, or perhaps a faster march toward monetary tightening and a stronger dollar, which would provide some downward pressure on prices and potentially alleviate any economic growth barriers of oil prices above $80 Brent.
Nevertheless a release of Strategic Petroleum Reserves (SPR) from the US would likely only have a temporary bearish effect on prompt prices and is not a lasting solution for an imbalance between supply and demand.
Another offensive could come from China, which is also struggling to keep oil and refined oil products in stock, especially as natural gas prices peak and there is extra incremental demand for fuel oils in the heating and power generation sectors.
China could, in coordination with the US or independently, react to the OPEC+ decision with a release of their own strategic reserves.
Moves by the US or China to release strategic reserves will likely only be communicated after Tuesday this week and the publication of the EIA’s short-term petroleum outlook report.
In September 2021, China held its very first auction from its strategic petroleum reserves, and though the volume of 7 million barrels was by no means a market mover, the event itself marked a historical pivot and signaled that China is willing to be an active speculator on the oil market.
However, China, which has been actively stocking up on crude inventories the past year and a half after the spectacular oil price crash of April 2020, may want to stay on the cautious side and keep inventories for a rainier day.
A release from the strategic reserve could help bolster Chinese inventories, but given that the actual storage levels are not public, the market reaction would be purely psychological rather than technical.
In today’s current market tightness, neither China nor the US, even as two big centers of demand, cannot single-handedly quell high oil prices. For the market to turn bearish, a coordinated government intervention policy is needed, especially if OPEC+ producers continue to whistle carelessly through winter’s rising prices.
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