Two Important Events for Oil Markets Today

Major Fundamental Events for Crude Oil on March 31

Oil markets will be closely monitoring these events on this final day of March:

OPEC+ Meeting

This alliance of 23 oil-producing nations are set to decide how much more oil to pump out and export to the world for May 2022.

OPEC+ had been gradually raising output by an additional 400,000 barrels per day each month. They’re widely expected to decide the same today for May’s output levels.

And today’s meeting could be another quickie. Their previous meeting held online earlier this month lasted just 13 minutes. So blink and you could miss it.

US Crude Oil Reserve Release

US President Joe Biden may announce the release of 180 million barrels (or 1 million barrels a day) of oil from US strategic reserves.
Such a move is intended to bring down gasoline prices in the US.

A release of 180 million barrels over months would be significantly larger than the previous two releases from US strategic reserves (30 million in March 2022, and 50 million in November 2021).

Those two previous announcements had little impact on oil markets given their relatively small size.

Both US crude and Brent oil prices are pulling back by over 5% today at the mere suggestion that more US oil could flood the markets.

Basic Economics and Crude Oil Prices

Let’s go back to some basic economics to understand to better understand why oil prices are reacting this way today what these events matter for markets.

Here’s how supply and demand impacts prices:

• When supply falls short of demand (scarcity), prices tend to rise.
• When there’s an oversupply (supply exceeds demand), prices tend to fall.

How Would This Reported US Strategic Reserves Release Impact Crude Oil Prices?

If White House unleashes 180 million barrels into the US economy, that means there is more supply to meet demand.

This brings prices into more of an equilibrium and helps prices moderate (as we’re witnessing now).

Of course, the exact details have yet to be announced. But given the markets’ forward-looking nature, traders tend to react first based on assumptions.

Whether prices can stay at these levels very much depends on the details released by the White House.

If the headline figure is significantly LESS than 180 million barrels, then oil prices could swiftly rebound (less incoming supply than expected, meaning demand still exceeds supply)

If the headline figure is significantly MORE than 180 million barrels (after all, the US has about 568 million barrels of oil in its strategic reserves), then prices could fall even further!

Markets will also want to see whether the White House intends to replenish its strategic reserves.

If markets discover that the US government will be forced later to buy back what oil it had already unleashed from its strategic reserves, then that might only have a fleeting impact on prices.

In other words, if markets get the sense that this extra supply is only a temporary band-aid, and not a lasting solution, then Brent and US crude prices could look past today’s announcement (again, forward-looking) and may not stay down for long.

Also, note that such a move by the White House may also put the pressure on other US allies around the world, such as the UK, Japan, and South Korea to release oil from their respective strategic reserves as well. Although these non-US amounts will likely be a lot smaller, such a coordinated move could offer more relief to a world that’s desperate for more oil, while helping prices moderate lower.

OPEC+ Meeting

But a massive release from the US strategic reserves could trigger a response from OPEC+.

To be clear, OPEC+ is widely expected to stick with its “gradual” approach to restoring oil output (400k bpd hike per month). Still, the alliance has built a penchant for making shock announcements since the pandemic.

A shock OPEC+ announcement today to halt its pans to raise output could see prices recovering sharply upwards (less supply to meet global demand).

Keep in mind that many OPEC+ members can’t even pump out more oil even if they wanted to.

Years of underinvestment as well as political instability have led to a severe lack of spare capacity for oil-production in countries such as Nigeria, Angola and Libya. Only the likes of Saudi Arabia, the UAE, and Iraq have sizeable spare capacity of a combined 3 million barrels per day or so.

Russia Conflict and OPEC+

To further complicate matters, given Russia’s status as an influential member within OPEC+, the alliance may not want to invoke Russia’s wrath by pumping out more oil. Such a move (to raise output) would be seen as bowing to pressure from the US administration. After all, President Biden had attempted (unsuccessfully) since last year to encourage OPEC+ to pump more oil to bring prices down.

Also note that Russia’s oil has already been officially banned by the US and UK as well. Although the EU has refrained from such a drastic move for the time being, such a risk could resurface the longer the Ukraine invasion continues. As things stand, Russian oil is already struggling to find buyers around the world, as countries fear the potential repercussions of sanctions.

Conclusion

Hence, we still find ourselves in a world where there still isn’t enough oil to meet global demand.

More people (perhaps even yourself) are jetting off on vacations abroad.

Daily commutes to work, school runs, or social gatherings are ramping up.

And more of the world’s factories are coming back online.

All that economic activity should keep oil prices supported around $100, barring a major shocker today.

If either the OPEC+ decision or the White House announcement today upends that global supply-demand calculation, that could inject even more volatility into oil prices as we enter the second quarter of what has already been an eventful 2022.

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