Gauging the oil price trend when two factors competing for dominance

 


The price of crude oil slightly dipped on Wednesday, in line not necessarily with the cumulative release of the SPRs, Strategic Petroleum Reserves, by the top global consumers.

The drop coincides also with the latest data released by the API, American Petroleum Institute, which showed yet another US crude oil inventory build: the API said on Tuesday the figure was 2.307 million barrels for the last week; by contrast, there was a drop in the US crude inventories by 0.655 million barrels last week, for the week before.

Both the API and EIA, the US Energy Information Administration, have been showing a consistent pattern, when it comes to the US crude oil inventories, sometimes, with one-off blips, as it happened last week – the US crude inventories have been growing.

In this context, it is difficult to attribute the price drop that we witnessed this week so far, solely to the joint release of the SPRs by the US, Japan, China, India, South Korea and the UK.

On the other hand, some analysts see the move as more of a cosmetic gesture, referring to the actual numbers involved.

Japan, for instance, released just 1 million barrels from its own SPR; it has in its possession just 140-days-of-daily-consumption; the release by India and South Korea are equally modest, because they had been doing it at certain times in order to curb the steep rise in the price crude oil in September and October; the only country, other than the US, that contributed to the collective action significantly was China, despite being at odds with the US on many issues.

In short, the impact on the price of crude oil is going to be limited in the long run, when the short-term sentiments slowly die out.

The OPEC+ is, meanwhile, is going to meet next week amidst the unprecedented development that it has faced. Some analysts hope the OPEC+ may hit back by halting or curtailing the planned output hike, despite the risk of being at the loggerheads with the main player that guarantees the security in the Middle East, the US.

The other possibility will be raising the price of crude oil on regional basis. That’s risky too, especially when a disastrous resurgence of the Covid-10 is already on the horizon.

The oil producers in the Middle East, for instance, can target their main loyal customers in the region, ranging from India to Japan. That may not go down very well politically with the countries in question – in the long run; at uncertain times, everyone needs allies – including the members of the OPEC+.

The US managed to muster support for its move, because it maintains good relations with its allies despite a catalogue of disagreements on many issues; it still managed to get China on board too, despite the diplomatic relations being seriously strained.

As for the OPEC+, it did not handle the concerns of the consumers very well, ignoring their pleas for help in their hour need, having been battered by the pandemic.

The unprecedented step that the US led in taking up may be a recurring move in the future, when the price of crude oil goes past a certain mark, defined by the Western politicians as ‘destructive for growth’.

It came about when the price of crude oil hovered just over $80 a barrel. We can just imagine what the reaction would be, if it ever reaches close to $100 a barrel again, fulfilling the whims and fancies of some investment bankers.

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