Oil prices slid to near six-week lows on Thursday 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, asking China to join coordinated action for the first time, comes as inflationary pressures, partly driven by surging energy prices, start to produce a political backlash, as the world fitfully recovers from the worst health crisis in a century.
Brent crude was down 41 cents, or 0.5%, to $79.87 a barrel by 0712 GMT, after earlier dropping to $79.60, the lowest since Oct. 7.
U.S. crude was down 70 cents, or 0.9%, at $77.66 a barrel, having fallen earlier to $77.40, also the lowest since early last month.
Prices hit seven-year highs in October as the market focused on the swift rebound in demand that has come with lockdowns being lifted 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," Citigroup (NYSE:C) analysts said in a note.
"But ... domestic refineries are unlikely to get an extra benefit, as light-end yields appear to have been already maxed out," they added, referring to margins for producing gasoline and other motor fuels.
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 exploration.
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," said Vivek Dhar, commodity analyst at Commonwealth Bank of Australia (OTC:CMWAY). "There's a good likelihood that markets have already priced in such an event."
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 state reserve bureau said 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.
"We are thoroughly reviewing the U.S. request, however, we do not release oil reserve because of rising oil prices. We could release oil reserve in case of supply imbalance, but not to respond to rising oil prices," the official said.
In its weekly stockpile report, the United States Department of Energy said late on Wednesday that crude inventories fell unexpectedly last week as refineries, enjoying profitable processing rates, ramped up output before the winter heating season. [EIA/S]