Oil extends drop as chance of coordinated reserves release rises

Oil extended declines – after four weeks of losses – on signs the US, China and Japan are all preparing to tap national crude reserves as concerns over accelerating inflation intensify.

Futures in New York fell below $76-a-barrel after losing almost 6 percent last week. US President Joe Biden has been talking about a possible release from the Strategic Petroleum Reserve for several weeks, and the Yomiuri newspaper reported over the weekend that Tokyo may make a joint announcement on the issue with Washington as soon as this week. China indicated last week that it was working on another sale from its national inventories. 

The return of virus restrictions in Europe, meanwhile, suggests there could still be a threat to global energy demand from a resurgent Covid-19. Austria goes into a full lockdown on Monday, while Germany and other nations are cracking down on the unvaccinated as cases spike. 

Oil has fallen from a high in late October as speculation the US and other countries would release reserves increased. Any national sales will need to be pretty substantial to move prices further, with Goldman Sachs Group Inc. saying last week that the impact of around 100 million barrels of reserves auctions was already priced into the market. 

An internationally coordinated release would, however, send a powerful message to the OPEC+ alliance, which has so far resisted calls to restore supply faster. Biden and Chinese President Xi Jinping talked about the merits of utilising strategic reserves during their summit last week.

“The US has been talking for a few weeks but they have done nothing,” said Vandana Hari, founder of Vanda Insights, referring to the release of strategic reserves. “The fact they did not do it at multi-year peaks is a sign they’re unlikely to make the move. Oil prices are sliding due to the outbreaks in Europe, that means pressure is already easing.”

Prices:

• West Texas Intermediate for January delivery fell 0.4 percen to $75.63-a-barrel on the New York Mercantile Exchange at 11:17am Singapore time after tumbling 3.7 percent on Friday.
• Futures lost 5.8 percent last week.
• Brent for January settlement dropped 0.5 percent to $78.48 on the ICE Futures Europe exchange after declining 2.9 percent on Friday.

Japan’s Oil Stockpiling Act doesn’t allow for the sale of reserves due to high prices, but both the government and the private sector currently hold more reserves than the minimum required under the law, according to the report in Japan’s Yomiuri newspaper, which cited government sources. Tokyo is considering releasing part of these excess reserves, which it believes can be sold without breaching legal restrictions, it said.

Other market news:

• Saudi Aramco said it will continue to look for investment opportunities in India, days after Reliance Industries Ltd. scrapped a plan to sell a stake in its oil-to-chemicals unit.
• Colombian front-runner Gustavo Petro said his first decision as president would be to stop awarding oil exploration contracts, according to an interview with El Tiempo.