What do you get when almost 2.5 mbpd of crude oil will gradually be released back to the market? A rally. After the Libyan force majeure was lifted the OPEC+ group re-confirmed its intention to go ahead with the planned tapering of output restriction in coming months. Clearly these extra barrels, 300,000 bpd from Libya and 2.1 mbpd from the producer alliance, will easily find home and will quickly be absorbed as global consumption is expected to pick up soon, so does the thinking go.
Adding to the feel-good factor was Goldman’s re-iteration of its view on oil. The investment bank expects Brent to reach $80/bbl in the coming six months as it foresees an unprecedented 5.2 mbpd global oil demand growth during this period. The performance of the past few days demonstrates the unbroken faith of the market in healthy economic and demand recovery, and it also implies that the perilous and devastating Covid nightmare engulfing in India, Japan and Turkey, amongst others, is not expected to have a long-lasting impact on economic expansion. Perceptions and expectations have taken over from recent wariness and doubts.
When confidence is on the rise a neutral US oil inventory report will not put out the bulls’ fire, it rather adds fuel on it. Crude oil and gasoline inventories were unchanged but the 3.3 million bbls draw in distillate stocks was viewed as positive. Total commercial stocks declined 1.6 million bbls, which is not much but it was enough to push the current level below the 5-year average for the first time in more than a year. Stock re-balancing is in full swing in the US and therefore in the developed part of the world, as well. If demand forecasts prove accurate then the trend is unlikely to reverse, especially in case it is coupled with OPEC+ adherence to its current production plan.
The partnership between the fiscal and monetary masters of US policies also contributed to yesterday’s solid performance. The Federal Reserve chair pledged to continue with its current asset-buying programmes whilst the leaps the US economy have taken has been widely acknowledged. Joe Biden, in his maiden speech to the Congress, proposed yet another stimulus package, worth $1.8 trillion and called the “American Families Plan”, that would be largely funded by corporate and capital gain tax rises. US stocks finished the day largely unchanged but Asian equities are on the rise this morning.
Is the NOPEC bill a serious threat? No, it is not.
During its more than 60-year of existence the Organization of Petroleum Exporting Countries has faced several obstacles to overcome, has had to deal with numerous threats and has also used oil as a political and economic weapon to protect the interest of member countries. Over the past twenty years it has occasionally also had to fend off accusations of anti-competitive practices. The No Oil Producing and Exporting Cartels Act (NOPEC), a US Congressional bill was first introduced in 2000 with the intention of removing state immunity from national oil companies. The bill would enable the US Department of Justice to bring lawsuits under US anti-trust law against NOCs for limiting oil supply and impacting oil prices. NOCs are currently exempt from the provisions of the Foreign Sovereign Immunities Act when acting in a commercial capacity.
The latest attempt to pass the bill was initiated last week when a legislation to sue OPEC countries under the US anti-trust law was passed by a US House panel. The bill was introduced by Republican Representative, Steve Chabot, who accused the organization of keeping “the price of crude oil and gasoline arbitrarily high in the United States”. The organization was quick to counter and its Secretary General, Mohammad Barkindo, has urged member countries to lobby against the bill and engage with the US Administration over the proposed legislation.
The timing of the proposed bill is curious as it came less than three weeks after OPEC and its 10 allies decided to gradually increase production by 2.1 mbpd over the May-July period. Attempts to target OPEC usually gather momentum in a rising market but have been proved unsuccessful in the past and no different outcome is anticipated this time either.
There are probably several practical and legal reasons why the bill will not pass all the required legislative hurdles. US retail gasoline prices has not surpassed the level above which both the Senate Majority Leader and the House Speaker would feel it necessary to pay attention to NOPEC. This pain threshold is about $4/gallon. In fact, it is worth noting that the current US Administration’s climate agenda and its plans to hasten the energy transition would gain further support if retail fuel prices were high. It is also important to point out that the US is now the world’s largest crude oil producer. Criminalizing OPEC producers would have a devastating knock-on effect on US oil production and on states, Texas and Pennsylvania amongst others, where crude oil production a significant source of income. Ahead of next year’s mid-term elections the last thing the Biden administration wants is to alienate voters in oil producing states.
OPEC’s Secretary General also underlined the disadvantages of the NOPEC bill in his letter to member countries: it would jeopardize US interests overseas, undermine the currently harmonious trade and energy relations between the US and member countries and could lead to unnecessary volatility and might have an adverse impact on oil prices.
From the legal perspective OPEC is also protected. This protection is based on the fact that OPEC is an inter-governmental organization. US courts do not have jurisdiction over foreign governments, consequently anti-trust laws are not applicable to OPEC. Secondly, the United Nations has recognized and authenticated OPEC’s mission back in 1962 – the stabilization of prices in the international markets with a view to elimination harmful and unnecessary fluctuations. It creates another legal hurdle to sue OPEC. And lest we forget the eternal dilemma: is it reasonable and acceptable to pillorize OPEC for allegedly driving US oil prices higher when deregulation incentivizes the financialization of the oil market, which, in turn, occasionally leads to adverse and irrational price movements just like the rally to $150/bbl in 2008?