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Oil markets: Why investors should focus on Covid rather than SPR release

Oil markets: Why investors should focus on Covid rather than SPR release

Crude oil prices pulled back from near seven-year highs to $85/b for Western Texas Intermediate (WTI) on Nov 9th to $76.50 on Nov 17th, from where it bounced a little bit to $78.78 as of Thursday noon.

This appeared to be a market response to US President Joe Biden’s suggestion for a coordinated major consumers SPR (Strategic Petroleum Reserves) release in an effort to cut high oil prices, according to Reuters. The Biden administration asked China, India, Japan, the world’s largest oil-consuming nations, to consider releasing crude oil stockpiles. If executed, such a coordinated move would be unprecedented from the consumers’ side.

At this moment, it is unclear if such a move will come to fruition. One potential issue would be that except for the United States, most other consumers are not large oil producers themselves. Therefore, they might be unwilling to risk long-term relations with major oil producers. 

For example, Saudi Arabia has a long-term oil supply relationship with China by where China can always negotiate a certain discount being such a large customer and commanding certain leverage in the supply negotiations.

Thus, such coordinated moves, involving China, India, South Korea, or Japan, might be seen as unfriendly by Saudi Arabia and OPEC in general, who have been trying to balance oil prices for a very long time now. OPEC argues that certain oil prices are needed for sufficient upstream exploration and development to secure future oil supplies.

Another problem is that most countries do not use SPR’s as a tool to regulate oil prices. The majority are set for events of natural disaster, armed conflict, or any other emergency, and gradually rising oil prices are none of those. Moreover, Reuters cites a Japanese government official who indicated that the law bans oil reserves from regulating prices.

The last coordinated oil stockpiles release happened in 2011 during the war in Libya. An effort was coordinated by IEA (International Energy Agency) based in Paris. IEA is specifically tasked with keeping an eye on SPR’s in 28 member states. As of this moment, there are no indications if IEA would back such a US initiative.

Additionally, it is not clear if such a release would have anything more than a short-term effect. It would probably be enough for OPEC to delay the monthly supply increase (currently at 400kb/m) to counteract such a move (read in-depth about the long-term oil market outlook here).

Finally, it sends a very confusing message from the White House. The world just witnessed coordinated efforts at COP26 to stop climate change from breaching a 1.5C increase by 2100 (global mean temperature rise above pre-industrial levels agreed in Paris).

At the COP26 summit in Glasgow, president Biden warned that the world only has “a brief window” to combat the growing impacts of climate change. However, the conventional wisdom is that high oil prices are good for the accelerated adoption of EVs (electric vehicles), therefore, it seems as if the long-term goals of this administration are not going hand in hand with short-term actions.

Winter season can bring Covid-19 discount baked in the oil futures price

What’s really behind the recent oil price drop? Unfortunately, we have to talk about COVID-19 one more time. According to the John Hopkins University worldwide coronavirus cases are on the rise, especially in Europe.

As a matter of fact, Germany reported over 263,000 new cases throughout last week and is well underway to reach another record this week with over 68k just for Wednesday alone. This would bring weekly cases to double the weekly peak reached in December of 2020.

Although mortality rates are still comparatively low, nonetheless they are still rising. Total deaths in Germany, with covid reported as the cause, are very likely to surpass spring peaks of both 2020 and 2021 (although well below winter 2020 peak). 

On the other side of the pond, US COVID-19 cases halted their slide downwards at the end of October and are slowly creeping up with early signs of acceleration. 

Weekly Covid-19 cases in Germany (left image) and daily cases in the US (right image, John Hopkins University Covid-19 dashboard, accessed 11/18/2021).

The developments oil traders are following are related to the response national governments are forced to take to address rising covid cases. Germany just announced new Covid restrictions for unvaccinated. Moreover, Austria on Friday introduced a full lockdown that caught commodities markets by surprise.

Therefore, it is reasonable to expect that coming into the winter season we will see some covid-19 discount baked in the oil futures price rather than a premium for expected demand rebound. And that is an important shift for short to mid-term trading compared to just a couple of weeks ago. 

All of this could have a measurable negative effect on the oil demand. OPEC, IEA, and EIA all predict that oil supply-demand will balance in Q1 2022 and even flip to the surplus. A New covid-19 wave could accelerate this trend.

“There are some signs of decreased oil demand in the European Union in October. Global oil demand is still under pressure from the Delta COVID variant,” Russian Deputy Prime Minister Alexander Novak said, explaining why OPEC+ has chosen not to add more barrels.

Vaccination rate, selected countries (; accessed 11/18/2021)

One of the main reasons for the shift in the oil demand expectations is that the “work from home” approach is being encouraged once again.

What traders are focusing on is the trend of infections. If we go back to the fall of 2020, and even spring of the same year, Europe was at the front of the pandemic, weeks ahead of the US. The cause for concern is that the US and Germany have almost identical vaccination rates and, therefore, there is no reason to think this winter in the US would look in any way different than how things are progressing in Germany.  

My five cents advice: forget about SPR, focus on Covid-19 instead for the next few weeks. 

Disclaimer: This article is the author’s personal opinion and is not a recommendation to buy or sell any stocks, futures, or other derivatives. 


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