US crude tumbled as much as 3.5% on Friday, hitting a fresh six-week low of $76.17 a barrel. In just nine days, oil prices have sunk 10%.
“We will definitely see some pricing relief on gasoline at the pump,” Tom Kloza, president of the Oil Price Information Service, told CNN on Friday, adding that the relief will be “feather-like as opposed to plunges.”
“It looks for now as though the 2021 peaks have been established,” Kloza said.
The lockdown is raising fears in the oil market of tough new health restrictions elsewhere that will slow the economic comeback and eat into energy demand.
“The demand signals today are overwhelmingly bearish,” Louise Dickson, senior oil markets analyst at Rystad Energy, wrote in a note on Friday. “The risk is real in Europe, especially if Austria’s move to lockdown has a domino effect across the continent. If Germany follows suit, sub-$80 price levels may be here to stay.”
Will China and America team up?
A coordinated release from two of the world’s biggest energy consumers would have a bigger impact than if the Biden administration acted alone to tap the Strategic Petroleum Reserve.
Officials in China put out a statement on Friday suggesting that a release of barrels from the country’s emergency reserve is on the table.
“The bureau is pushing forward with crude oil release-related work at the moment,” authorities that oversee China’s strategic oil reserves said in a statement to CNN.
According to a readout published by the White House, US President Joe Biden and Chinese President Xi Jinping discussed during their virtual summit this week the “importance of taking measures to address global energy supplies.”
A coordinated release by the United States and China could also be used as a bargaining tool to get OPEC+ to open up the taps, after months of refusing to do so.
“There is firepower with a concerted effort,” said Robert Yawger, director of energy futures at Mizuho Securities.
Still, this is not a long-term solution, as releasing barrels from emergency reserves doesn’t solve the underlying supply-demand mismatch. And these emergency reserves hold a finite amount of oil — crude that is typically reserved for supply shocks, not surging demand amid an economic recovery.
Releasing barrels today leaves the reserves with less of buffer for the next crisis, whether it’s a hurricane, a conflict in the Middle East or another supply shock.
Goldman Sachs reiterated in a new report to clients on Thursday that a coordinated release would “only provide a short-term fix to a structural deficit.”
The Wall Street bank argued this coordinated release is now “fully priced in,” meaning the impact to markets has already happened.
“In fact, if such a release is confirmed and manages to keep oil prices depressed in the context of low trading activity into year-end, it would create clear upside risks to our 2022 price forecast,” Goldman Sachs strategists wrote.
In other words, at least some on Wall Street are already looking past this emergency intervention — before it even happens — and predicting higher prices ahead.
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