SPR Rumours Send Oil Lower

Biden expected to release oil from reserves

Asian markets are being dominated today by the news that US President Biden is apparently considering a material release of oil from its strategic petroleum reserves (SPR), which could total a million barrels a day and potentially total 180 million barrel. That is roughly 1/3^rd of the total SPR. WTI has immediately dropped by around 5.0%, with Brent crude not far behind.

Depending on who you talk to, the amount of Russian crude sanctioned from international markets now is around 3.5 million barrels. If the US releases a million barrels a day over the next six months, and OPEC+ continues hiking by 400,000 bpd in that time frame, the output gap will have considerably narrowed by the US mid-term elections. How convenient.

Of course, OPEC being OPEC, it may not be that simple. The OPEC+ Joint Technical Committee (JTC) has just announced the immediate firing of the International Energy Agency (IEA) as their secondary data source, replacing them with Wood Mackenzie. I’m not sure what to read into that, but I suspect firing the IEA is positive news on the international relations front between OPEC+ and the US.

The ministerial meeting this week should announce the 400,000 bpd increase will go ahead, but if the US measures materially assist in market rebalancing over the coming months, OPEC+ may respond. The Game of Thrones has nothing on the plot twists of international oil. Another plot twist is emanating from New Zealand of all places, perhaps the world’s greatest energy NIMBYs. The energy minister said that the IEA members as a whole could announce a coordinated SPR release at its meeting on Friday. Perhaps that’s why they just got fired by OPEC+?

My initial reaction is that the Biden plan, if correct, could put a cap on international oil prices but will likely see the Brent/WTI spread widened. It will not immediately change the structural deficit caused by Russian sanctions. Therefore, although oil prices may have seen their highs since the rent-a-crowd all started calling for USD 200 oil, we shouldn’t pin our hopes on oil moving to the low 80s. 100 dollars to 120 dollars for Brent crude still sounds about right. Of course, OPEC+ may yet have something to say on the matter. And although President Putin has allowed energy payments in euros to continue for now instead of roubles, we definitely haven’t seen the last of that story.

With oil politics giving me a headache, it’s time to look at this morning’s slew of Asian data releases. China’s official Manufacturing PMI eased from 50.2 to 49.5 in March. The Non-Manufacturing PMI for March slumped from 51.2 to 48.8. The headlines made for ugly reading but the impact on China equity markets has been minimal. The city lockdowns and mass testing by Chinese officials in March have clearly distorted the data and China will get a pass mark this month because of that. Things will get darker if China’s Covid-zero policy sees much wider spread and extended lockdowns. We are not there yet.

South Korean Business Sentiment, unsurprisingly, retreated to 83 in March, but Industrial Production and Manufacturing for February beat expectations handsomely, rising 6.50% and 6.20% YoY respectively. Retail Sales also clung to positive territory. Semiconductors and electronics led the charge and demand remained relatively immune to geopolitical ructions internationally. Japan’s Industrial Production eased to 0.10% for February, likely impacted by earthquakes. Meanwhile, Singapore Bank Lending in February rose to SGD 829.5 bio. All in all, Asia continues to show resilience despite the Ukraine war, with the data being moved by national events and not international ones, for now. It won’t be enough to set off a bull market in Asian equities, but it certainly isn’t a reason to dump them.

Probably the most concerning data are from Australia. Private Sector Credit rose slightly to 7.90% in March YoY, but preliminary Private House Approvals MoM for Feb soared by 16.50%. Preliminary Building Permits MoM for Feb meanwhile, jumped by a mind-boggling 43.50%. This is despite extensive flooding in parts of the country, or perhaps because of it. Either way, Australian interest rates are near record lows, lending is increasing, and a building boom is occurring. The pressure is going to seriously mount on the RBA’s ultra-dovish stance after this data set.

The pan-Europe unemployment data will have a minimal impact this afternoon. If the Russian situation bites deeper in the months ahead, it will become more important. US Personal Income and Spending for Feb are expected to rise by 0.50%. The headline and Core PCE Indexes could rise by near 6.0%, probably sending Fed hiking jitters through the market again. US yields fell once again overnight, but that may be a temporary lull.

Tomorrow, we get Japan’s Tankan Survey and China’s Caixin Manufacturing PMI along with Eurozone Inflation. Then follows the week’s data highlight, US Non-Farm Payrolls interspersed with ISM Manufacturing. Markets are looking for a jobs gain of 490,000 after last month’s blockbuster 625,000 gain. Trading in the immediate aftermath of the Non-Farm’s is a good way to lose money I’ve found; I shall content myself to watch from the sidelines.

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