Oil Prices Decline as China Readies Release of Crude from Strategic Reserves

Oil prices fell on Thursday, adding to an overnight plunge as China said it was moving to release reserves following a Reuters report that the United States was asking big crude consumers to consider a coordinated release of stocks to lower prices.

The bid by the U.S. administration to shock markets comes as inflationary pressures, partly driven by surging energy prices, starts to produce a political backlash, as the world fitfully recovers from the worst health crisis in a century.

U.S. crude was down 84 cents, or 1.1%, at $77.52 a barrel by 0348 GMT, having fallen 3% overnight.

Brent crude fell 44 cents, or 0.6%, to $79.84 a barrel after falling 2.6% to the lowest close since early October on Wednesday.

oil Performance Chart
U.S WTI Performance Chart

Prices hit seven-year highs last month as the market focused on the swift rise in demand that has come with lockdowns being lifted and economies recovering against a slow increase in supply from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, called OPEC+.

“Should the U.S. administration order an SPR (Strategic Petroleum Reserve) release, that could send a strong political sign, but … domestic refineries are unlikely to get an extra benefit, as light-end yields appear to have been already maxed out,” Citigroup analysts said in a note.

U.S. producers have also been reluctant to overspend on drilling after they were punished by investors for gorging on debt to pay for new drills.

The International Energy Agency and OPEC have said in recent weeks that more supply will be available in the next several months. OPEC+ is maintaining an agreement to boost output by 400,000 BPD every month so as not to flood the market with supply.

“Releasing strategic stockpiles is only likely to lower oil prices temporarily. There’s a good likelihood that markets have already priced in such an event.” Vivek Dhar, commodity analyst at Commonwealth Bank of Australia.

The United States and allies have coordinated strategic petroleum reserve releases before, for example in 2011 during a war in OPEC member Libya.

But the current proposal represents an unprecedented challenge to OPEC, the cartel that has influenced oil prices for more than five decades because it involves China, the world’s biggest importer of crude.

China’s┬ástate reserve bureau┬ásaid it was working on a release of crude oil reserves although it declined to comment on the U.S. request.

A Japanese industry ministry official said the United States has requested Tokyo’s cooperation in dealing with higher oil prices, but he could not confirm whether the request included coordinated releases of stockpiles. By law, Japan cannot use reserve releases to lower prices, the official said.

A South Korean official confirmed the United States had asked Seoul to release some oil reserves.

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