Crude Oil, WTI, Strategic Petroleum Reserve, WTI/Brent Spread – Talking Points

• Oil prices extend overnight losses in Friday’s Asia-Pacific session
• President Biden SPR announces action to meet about 5% of US demand
• US exports could rise as Brent continues to trade at a premium to WTI

Oil prices fall in Asia-Pacific trading, extending losses overnight. WTI crude prices are down around 1.5%, but Brent prices – the global benchmark – are nearly 5% lower. The drop came after President Joe Biden announced that the United States would release one million barrels of oil per day from the Strategic Petroleum Reserve (SPR) for 180 days.

This would potentially see 180 million barrels of oil hit the market over the next six months, representing around 5% of total US demand, assuming 2021 consumption levels. However, demand is expected to increase this year amid almost non-existent Covid restrictions across the country. The additional oil should help moderate prices, although the volatile nature of the market amid the evolving situation in Ukraine makes it more difficult to forecast demand and supply levels.

The U.S. move may also signal that U.S. intelligence and the Biden administration believe the conflict in Ukraine may not see a quick resolution. China and India would buy Russian oil, albeit at a steep discount. However, the geographical positioning of global supply lines makes the global benchmark, Brent, more vulnerable to sanctions-related supply disruptions. This may explain why Mr. Biden’s announcement hit the global benchmark harder.

The performance differential in recent days has extended the discount at which WTI is trading against Brent. WTI crude prices are trading at a discount of more than $7.10 a barrel after hitting $11.35 a barrel, the highest since April 20, 2020. The discount could boost U.S. crude exports as overseas buyers are scrambling to find the cheapest product available. That could push oil away from Cushing, Oklahoma, and toward the Gulf Coast, ultimately reducing U.S. inventory levels.

Such a scenario could partially negate the purpose of Mr. Biden’s SPR actions. At the same time, however, it may also encourage US producers to increase production at a faster rate. Increased production would bode well for lower prices beyond the near term. Traders may be inclined to watch U.S. export numbers and rig counts more closely in the coming months as the situation unfolds.

Brent/WTI Spread – Weekly Chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter