President Joe Biden on Thursday announced a historic release of oil from the U.S.' emergency reserves in an effort to quell surging oil and gas prices. But analysts say the longer-term impact may be just the opposite. In other words, while there could be some short-term relief from surging commodity prices, artificially increasing supply now by tapping into strategic reserves won't address the structural supply issues in the market. Lower prices now won't lead to demand destruction, which can help shake out markets, and it also won't incentivize producers to open the taps. "We view [Thursday's] announcement of the largest SPR release in US history as the clearest indication yet that the future availability of production capacity is at risk owing to limited Shale and OPEC+ spare capacity coupled with prevailing strong demand," said JPMorgan. "[S]uch a release would help the oil market rebalancing in 2022... This would reduce the amount of necessary price-induced demand destruction, the sole oil rebalancing mechanism currently available in a world devoid of inventory buffers and supply elasticity," added Goldman Sachs. Lower prices, stronger demand Goldman said that lower prices now will lead to strong demand and slow shale production, ultimately leading to a deficit in 2023. Further, the Strategic Petroleum Reserve will eventually need to be refilled. Thursday's announcement is the third time Biden has tapped the reserve. Rising gas prices and the impact on inflation have been a headache for his administration. Biden released 30 million barrels in March, after releasing 50 million barrels back in November. This time, however, it's of a different magnitude entirely. The administration will release 1 million barrels per day for the next six months, with the total release amounting to roughly 180 million barrels. ClearView Energy Partners noted that this is the largest ever release by a factor of more than three. The second largest was November's release. Oil prices dropped in overnight trading Wednesday when reports first surfaced about the administration's possible move. The decline continued on Friday as member countries in the International Energy Agency, which includes the U.S., said they would also tap emergency reserves . West Texas Intermediate crude , the U.S. oil benchmark, hovered around $100 per barrel Friday. At one point during the session it fell below its 50-day moving average for the first time since early January. Both WTI and international benchmark Brent crude were headed for their worst week in two years. A temporary impact Still, with so much supply uncertainty stemming from Russia's war on Ukraine, analysts said the impact of additional barrels hitting the market could be temporary. "The knee-jerk sell-off from the SPR announcement of the release of 1-million barrels a day from the SPR over the next six months won't have a lasting impact on oil prices, so if geopolitical risks continue to intensify, oil will recover most of this week's losses," noted Ed Moya, senior market analyst at Oanda. Evercore ISI called the U.S.' decision to once again tap the reserve "akin to beating a dead horse." To put the numbers in perspective, the U.S. uses roughly 20 million barrels of oil per day. Global demand sits around 100 million barrels per day. Energy markets have been thrown into turmoil since Russia is a key oil and gas producer and exporter — especially to Europe. Markets were already tight ahead of the invasion, so the war has sparked fears over what might happen should Russian production be taken offline. Data varies around just how much Russia is still exporting, but the International Energy Agency said that 3 million barrels per day of oil could be at risk as foreign buyers shun the nation's oil. "The looming flood of U.S. barrels does not change the fact that the market will struggle to find enough supply in the coming months," noted brokerage PVM. "The U.S. release pales in comparison to expectations that 3 mbpd of Russian oil will be shut in as sanctions bite and buyers spurn purchases." "Simply put, it will fall short of absorbing the lost supply from Russia," the firm added. — CNBC's Michael Bloom contributed reporting.
Welders work on the Strategic Petroleum Reserve pipeline on June 1, 1980, in West Hackberry, Louisianna. Begun under President Ford to reduce the threat of oil embargoes, the SPR crude oil is stored in huge underground salt caverns along the Gulf of Mexico, a natural choice due to the proximity of many refineries and distribution points.
President Joe Biden on Thursday announced a historic release of oil from the U.S.' emergency reserves in an effort to quell surging oil and gas prices. But analysts say the longer-term impact may be just the opposite.