Tuesday, November 23, 2021

Consumers vs. Producers

Oil and politics can make for a volatile cocktail. 

The Biden administration is trying to shake up the state of play in the oil market with its announcement this morning that the U.S. would release 50 million barrels of oil from the Strategic Petroleum Reserve. It is doing so in a coordinated campaign of reserve releases from China, Japan, India, South Korea, and the U.K. to try to hold down rising energy prices. 

The market reaction has been muted. Oil prices rose today, but they had fallen more than 10% in recent weeks as expectations grew that the White House would act.

The last time the U.S. coordinated a release like this was in 2011, when Libya's civil war threatened oil supplies. Previous presidents have also authorized sales from the reserve after Hurricane Katrina in 2005 and amid the Persian Gulf War in 1991. 

This time could be different,  Avi Salzman of Barron's wrote today:  

On the one hand, the announcement is a last-ditch attempt by a president under political pressure to tamp down inflation. But it also looks like a more far-reaching effort that could ripple through oil markets for an extended period.

Historically, releases of reserves like this have had just a short-term impact on prices. But the format of the latest release points to a larger shift in the oil market, with oil consumers now attempting to exert the same kind of market muscle as producers led by OPEC. The U.S. release is a coordinated effort with China, India, Japan, South Korea, and the United Kingdom. The U.S. and China are the top two oil consumers in the world, together using more than a third of all the oil produced in the world.

"Today's historic but very unorthodox move is a clear message to OPEC+ that it's not the only actor on the global oil market stage," wrote Rystad Markets analyst Louise Dickson. "The coordinated effort represents the formation of an unofficial demand-side alliance that keeps OPEC+ in check if it fires up prices to a level seen as unsatisfactory to spur economic growth and keep consumer purchasing power in check."

OPEC, and its allies, particularly Russia, have much greater firepower when it comes to affecting the price of oil. The question is whether they will choose to use it after they meet a week from Thursday. Avi notes that analysts think the cartel could simply slow its planned production increases "to counteract the price-dampening effect of the reserve-releases."

The risk for the Saudis and other OPEC members is that too much muscle-flexing could prompt counter-measures from Washington. The risk for Biden is that tapping the reserves may not be effective in holding down energy prices.

With unleaded gasoline prices at the pump at $3.40 a gallon on average nationwide (up 81 cents a gallon since 2019), according to the AAA, U.S. politics is likely to remain an active ingredient in the oil market for some time to come. 

The Calendar

The debate over inflation could have new talking points tomorrow.  First, at 10 a.m., the Bureau of Economic Analysis will issue its report on consumer spending in October --  a report that includes the Federal Reserve's favorite measure of inflation, the personal consumption expenditure deflator, or PCE deflator. 

Then at 2 p.m., clues to what Federal Reserve policy makers may currently be thinking about inflation will be sought when the minutes from the Nov. 2-3 Federal Open Market Committee are released. 

At 8:30 a.m., the Bureau of Economic Analysis releases its second estimate of third-quarter gross domestic product. Economists forecast a 2.2% annualized rate of growth, higher than the BEA’s preliminary estimate of 2% from late October. The Census Bureau will report on durable goods in October. And the Labor Department reports on initial claims for state unemployment benefits for the week ended Nov. 13. 

Deere reports its quarterly results before the market opens tomorrow. 

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