SPR exchange mechanism central to US pressure on OPEC: analysts

The Biden administration pulled off an oil diplomacy win in helping to persuade OPEC+ to stick to its monthly 400,000 b/d production increases in the face of considerable demand uncertainty, analysts said Dec. 3 during an Atlantic Council event.

US talks with Gulf producers before the Dec. 2 decision focused on consumer nations' rare price-related stockpile release and the Biden administration's willingness to tap the Strategic Petroleum Reserve again if needed, said Helima Croft, RBC Capital Markets' managing director and global head of commodity strategy.

Of the 50 million barrels set to be released from the US SPR, 35 million barrels are being offered as an exchange. Any buyers will agree to take the barrels between mid-December and April, promising to return them over the next three years with interest.

"I do think the exchange mechanism was very important in terms of the politics of the SPR, because that made it at least credible when they said, 'we would do this again,'" Croft said. "I think that was part of the conversation with OPEC, was 'we can do this again.'"

Croft said an outright sale would be seen as a one-time move, given concerns over depleting the emergency stockpile.

A high-level US delegation held meetings in the UAE, Saudi Arabia and Qatar to discuss oil supply as well as other economic, infrastructure, climate change and sustainability goals, the White House said Dec. 3. The group included Deputy National Security Advisor for International Economics Daleep Singh, Deputy Commerce Secretary Don Graves and top State Department energy envoy Amos Hochstein.

Raad Alkadiri, the Eurasia Group's managing director, for energy, climate and resources, said the Biden administration had to essentially ask Saudi Arabia to "act contrary to what I would have said was their financial and political instinct" in sticking to the oil supply increases.

"For the United States, this is a new type of move," Alkadiri said, adding that the SPR has previously been used only for physical disruptions. "What the administration did here wasn't an emergency response. What the administration did here was choose to use the exchange mechanism and make it very clear to OPEC+ that it would be willing to use it again in the future as a market management tool."

Alkadiri added that by bringing China and other major consumers on board, the US was saying, "we can counter OPEC measures in the short term, and I think that's a brave new world that OPEC would rather not be part of."