Oil drops as US moves towards releasing more crude reserves

Crude prices fell on Thursday as the Biden administration moved towards another release of US emergency oil stocks to combat surging inflation.

International oil benchmark Brent crude dropped 3.9 per cent to $109 a barrel, after the Financial Times and other news outlets reported that the US was expected to announce its third big release of oil reserves since November.

Survey data also indicated a slowdown in Chinese industry as new Covid-19 lockdowns caused staff shortages and snarled up supply chains. US oil benchmark West Texas Intermediate fell 4.8 per cent to $103, while European wholesale gas prices also moderated.

Oil prices have risen almost 40 per cent so far in 2022, spurred higher by Moscow’s invasion of Ukraine and western sanctions on exports from Russia, the world’s second largest crude producer.

European equity markets were relatively muted, however, as analysts warned a one-off release of reserves was unlikely to alter the supply outlook for the long term. The regional Stoxx 600 share index added 0.1 per cent in early dealings, Germany’s Dax rose 0.6 per cent and London’s FTSE 100 rose 0.1 per cent. The Stoxx was on track to end the first quarter of the year more than 5 per cent lower.

Goldman Sachs said a reserve release of 180mn barrels would reduce the amount of “price-induced demand destruction” needed to bring supply and demand back into balance.

“This would remain, however, a release of oil inventories, not a persistent source of supply for coming years,” Goldman analyst Damien Courvalin said. “Such a release would therefore not resolve the structural supply deficit, years in the making.”

The International Energy Agency has warned that sanctions on Russia, a big energy exporter, could result in a reduction of 3 per cent of global oil output by April.

Analysts said the impact of any release of US oil reserves might prove limited and that markets would be looking to Thursday’s meeting of Opec+ oil-producing nations for signs of a more substantial boost to global output.

“Over the last 12 months, the US has released a net 66mn barrels of crude,” said Robert Rennie, head of global market strategy at Westpac. “It doesn’t really feel as if those releases to date have had much of an impact.”

Concerns over slowing demand from China, which is enforcing lockdowns in response to an outbreak of coronavirus infections, have also weighed on oil prices.

On Thursday, stock markets across Asia were lower after China’s purchasing managers’ indices tumbled into contraction territory, with both manufacturing and non-manufacturing PMIs falling more than expected.

Hong Kong’s benchmark Hang Seng index fell 1.1 per cent, while China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks was down 0.7 per cent. Japan’s Topix shed 1.1 per cent.

A statement from China’s statistics bureau blamed the contraction on disruptions to supply chains and staffing shortages caused by lockdowns imposed across China in recent weeks to curb outbreaks of Covid-19.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the latest readings “probably understate the hit to activity last month”, adding that “even if the outbreak is brought under control soon, it will still take a while for the economy to get back on track”.

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