Daily Management Review

Will the US manage to lower oil prices?


Oil traders and refineries will be offered a batch of oil from the strategic reserve of the United States in the amount of 11 million barrels with delivery from October 1 to November 30. As reported by Reuters, the auction for the sale of raw materials from the state storages is scheduled for August 28. The corresponding notification was received by companies that have registered for participation in oil deals with the US government.

Sales of strategic oil were started by the administration of Barack Obama. In the current year, according to the plan, up to 25 million barrels are planned to be sold, and by 2025 a reserve of 700 million barrels (at the beginning of last year) should lose almost a third.

About 90 million barrels of oil are consumed per day in the world. Therefore, from the point of view of the supply and demand balance, the intention to sell oil in such volume from strategic reserves should not affect the price at all. The price of oil has been rising in the last 5 days, and speculators are not even trying to use this information to push Brent below $ 72.

But this question can be viewed strategically. For the past 30 years, the US has been very careful about its oil reserves, and the desire to gradually sell them on the market can mean a new energy trend. Perhaps they are betting on new types of energy that are either already being developed or simply their appearance in 10-20 years is considered probabilistic. This model tells Americans that oil will lose its value. Then they can simply follow this probabilistic model, and at the same time strengthen the dollar, which has always been inversely related to oil prices: cheap oil means a strong dollar, and vice versa.

The Fed rate increase, as well as attracting capitals of the developing countries and collapse of their currencies, also fits this strategy. So, we are entering the epoch of another decline in oil prices, because there is two sides in this scenario: one is a strong military power, the US, and the other is represented by developing countries.

In addition to the growth in oil prices, the season of holidays in the US has also contributed in the increase in gasoline prices thanks to car travelling popular in the country. During this period, the demand for gasoline has traditionally increased, stocks are decreasing, and the price reacts with growth.

At the end of August, demand will decline, which together with the announced sale of oil from stocks will help reduce prices. The Clinton administration used such a tool to reduce prices in the 90's. Therefore, on the eve of the mid-term elections to the Congress, it is possible that the actions of the authorities are focused on the domestic market. The volume of 11 million is not enough to influence the global oil market, because it's only about 12% of the volume of oil production per day. If an additional 30 million barrels appear on the market, energy prices may fall, but the reduction will be limited to one day and is unlikely to fundamentally change the oil market. In the current situation, $ 50 per barrel is an extremely bearish scenario, the chances of which are no more than 1%. At the end of the year, the barrel of oil may stabilize around $ 70 per barrel.

source: bloomberg.com