Investing.com – Ben Laidler, global markets strategist at eToro, warns of the risks of plans by the United States and its allies to boost oil sales to contain the price of: “It’s risky and it could easily backfire” because “this is insufficient to offset the drop in Russian production of around 3 million barrels, it will leave US reserves dangerously close to ‘floor’ levels and the plan to buy back the barrels sold will lift prices in the medium term,” he said.
Laidler analyzes these factors and warns that we are playing with fire in the oil market:
The United States and its allies have planned to sell oil from its emergency “Strategic Petroleum Reserves” (RSP) to keep oil prices above $100. The United States is targeting sales of one million barrels a day, the equivalent of one percent of global supply, for six months. The allies plan a release of 60 million barrels.
This helps ease prices today, but it’s risky and could easily backfire. It is insufficient to compensate for the drop in Russian production of around three million barrels, it will leave American stocks dangerously close to “floor” levels, and its plan to buy back barrels sold will drive up prices in the medium term.
This supports eToro’s view that oil prices will be “higher for longer” and stocks are particularly attractive.
These planned sales could bring the United States dangerously close to the minimum level of its strategic oil reserve, at a time when Russian production is falling, when OPEC has less flexibility in supply than we think so (and may pump less to compensate for SPR sales), and where the projected increase in U.S. shale production and drilling activity is lagging.
International Energy Agency (IEA) rules require states to maintain reserves equivalent to 90 days of net imports. The United States could thus only have 70 million barrels of oil reserves, once its announced sales have been reduced to approximately 385 million barrels.
These forecast US oil sales are unprecedented, three times larger than previous sales. At best, they can limit price increases. At worst, they will draw attention to the tightness of the oil market and the lack of new supply.
The result will be continued global concerns about inflation and interest rates, along with demand for inflation “hedge” assets – from commodities to cyclical stocks – and new policy measures to protect consumers, such as tax breaks for “petrol” and direct payments, concludes Mr Laidler.