Oil Tumbled as U.S. and Allies Ready to Sell a Record Amount from Strategic Reserve

Oil prices tumbled on Thursday on the news that the Biden Administration is considering releasing up to 180 million barrels from its petroleum reserve (SPR), close to a one-time maximum in nearly 50 years of SPR history in response to the oil and gas supply crisis caused by the geopolitical events in the Eastern Europe. The announcement of oil release from SPR comes for the second time in a month.

As a result, May futures for Brent crude fell $4.87, or 4.3%, to $108.58 a barrel. As the May futures contract expired, the most active June futures fell from $5.08 to $106.36, after falling more than $6 earlier. Concurrently, the U.S. WTI futures for May delivery fell $5.90, or 5.5%, to $101.92 a barrel after hitting a low of $100.53.

Russia is the world’s third largest oil producer behind the United States and Saudi Arabia. In January 2022, Russia’s total oil production was 11.3 mb/d, of which 10 mb/d was crude oil, 960 kb/d condensates and 340 kb/d NGLs. By comparison, U.S. total oil production was 17.6 mb/d while Saudi Arabia produced 12 mb/d.

On top of that, Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia. In December 2021 – last available data – the county exported 7.8 mb/d, of which crude and condensate accounted for 5 mb/d, or 64%. Oil product exports totalled 2.85 mb/d, of which 1.1 mb/d of gasoil, 650 kb/d of fuel oil and 500 kb/d of naphtha and 280 kb/d of vacuum gas oil (VGO). Gasoline, LPG, jet fuel and petroleum coke made up the remaining 350 kb/d.

About 60% of Russia’s oil exports is directed to Europe, and another 20% go to China. In November, the latest month for which official monthly oil statistics are available, OECD Europe imported a total of 4.5 mb/d of oil from Russia (34% of its total imports), of which 3.1 mb/d was crude oil and feedstocks and 1.3 mb/d oil products. OECD Asia Oceania imported 440 kb/d of total oil from Russia in November (5% of total imports), while the OECD Americas imported 625 kb/d (17% of total imports). Approximately 750 kb/d of crude oil is delivered to Europe via the Druzhba pipeline system. Most immediately at risk are the ~250 kb/d of Russian oil transiting Ukraine via the southern branch of the Druzhba pipeline to supply Hungary, Slovakia and the Czech Republic. China is the largest single buyer of Russian oil, having purchased 1.6 mb/d of crude on average in 2021, equally divided between pipeline and seaborne routes. Russia is also a significant supplier of crude to Belarus, Romania and Bulgaria, and of products to most of the FSU countries, including Ukraine.

Analysts at Goldman Sachs wrote in their research note that yesterday's move would help balance the oil market in 2022, but it is not a game changer. “This can improve the situation only temporarily, but will not solve the problem of supply and demand imbalance in the coming years under the base case scenario. Such a release will not eliminate the structural supply gap that has been building up over the years.”

Member countries of the Energy Agency Committee (IEA) are due to meet on Friday, April 1st, at 12:00 to decide on a possible joint sale of strategic oil. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) and allies, including Russia, agreed at their meeting yesterday on March 31, to raise output by about 432,000 barrels per day beginning in May. The group has resisted repeated calls by the U.S. Administration and the IEA to pump more crude to stem bulging prices that climbed close to an all-time high after Washington and Brussels imposed sanctions on Moscow following the events in Ukraine. However, Saudi Arabia and the United Arab Emirates, which hold the bulk of spare production capacity within OPEC, have resisted calls for higher output, saying the group should stay out of politics and focus on balancing oil markets.