The United States has made their opening move in the Oil game of chess with OPEC+. After several attempts made to persuade OPEC to increase supply to bring oil prices down, the United States has decided to take laws into its hands. OPEC’s constant refusal has led to Joe Biden forming an alliance with other nations to oversupply the oil market.
The coalition J.U.I.C.E – Japan, United States, India, China, and England have decided to release oil from their strategic petroleum reserves in an attempt to flood the market awash with the black gold.
The United States will release 50 million barrels of oil over the coming months in a bid to depress prices and consequently reduce gasoline prices at home.
Looking at precedents, the United States has made use of an SPR release three times in the last two decades. President H.W. Bush released 17 million barrels during the first Gulf War in 1991. In 2005, W. Bush released 11 million barrels in the wake of Hurricane Katrina and in 2011, Obama released 30 million barrels to counter Libya’s disruptions.
In my earlier article, “OPEC Vs The United States: Who will win the oil war?” I predicted that the United States can make a diplomatic move and partner with different nations that have similar interests in bringing prices down. The United States has done exactly that.
So in addition to the United States SPR release, China has also decided to join India, Japan and Boris Johnson’s the United Kingdom in releasing from their strategic reserve.
After the announcement, Markets reacted in a different direction than Joe Biden would have wanted as oil prices went up 3% to end the trading day.
However, there’s a plausible reason for that price movement. My theory is the oil markets had already priced in the SPR release as markets had an 8% decline when the rumours of a United States’ SPR release surfaced in the earlier week.
Moving forward, it’s OPEC+ turn to play. How does the oil cartel counter the U.S-led coalition’s move? There are two possible options.
Option 1: Cede market share and further reduce output to achieve the optimal equilibrium they believe the market should be in.
Option 2: Maintain the status quo, cancel future production hikes, and hope oil prices continue to ignore the SPR release. But any decision to stop monthly output hikes to avoid supply surplus may now look like OPEC+ is taking on United States and so the optics would be bad.
The problem with option 1 is OPEC+ has long desired to seize market share and assert their dominance in the oil market since the advent of the Shale revolution in the United States that saw the US become the world’s largest oil producer.
Giving up the market share now would throw a spanner in the works in their market share objective and this might lead to a disagreement among member nations in OPEC+. Russia has always been the cartel rebel that set its eyes on oil market share. The United Arab Emirates threw a fuss in August when they clamoured for an increase in output as production cuts have hurt their revenue.
Now, option 2 would be to maintain production output and delay any increase in the next few months.
The United Arab Emirates says there is no need for OPEC+ to increase oil production any faster, despite pressure from major consumers such as the U.S. and Japan. Saudi Arabia is on track to make more money from oil at current prices than they have made in each of the last eight years.
The OPEC+ group of oil producers would have to defer at least two months’ worth of planned output increases to offset strategic stockpile releases led by the U.S – an uncomfortable prospect for some of the countries involved.
OPEC+ has little interest and incentives to retaliate against this move. It will be very difficult to find a consensus to “punish” their most important customers and political allies.
But the United States has found a new ally from the shadows of COVID. The Omicron variant has brought down oil prices by over 10% in one day. Now OPEC+ has a harder decision to make and has postponed technical meetings in order to analyze the impact of Omicron.
How OPEC+ will navigate the additional SPR release and Omicron variant would test the mettle of the oil cartel. To be fair, OPEC+ always knew the impact of COVID and that was their reason for not increasing supply as countries can proceed with lockdowns with limited travel due to restrictions.
The United States has further added that they can release more from the SPR if need be to ensure oil prices do not go up. As of the time of writing, WTI crude dropped to 7.9% to $64.43 and down 24% from the October 26 peak of $84.65.
For OPEC+, it is decisions! decisions! Or is this checkmate United States? How will OPEC+ react? We would follow their next meeting in December to watch how the cartel reacts.
Where does Nigeria come in all of this?
At the moment, Nigeria is still struggling with production. Another underwhelming output for last month as they keep falling behind their quota. In 2021, Nigeria is still receiving threats from militants who want regional empowerment by international oil companies. Nigeria’s oil peer, Libya, on the other hand, is receiving investment interest from IOCs as stability has begun to return to the area.
