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Oil at six-week low as China readies crude oil reserve release

Oil prices slid to six-week lows on Thursday as China said it was moving to release strategic reserves after a Reuters report that the United States was asking large consuming nations to consider a coordinated stockpile release to lower prices.

The bid by the U.S. to shock markets, asking China to join a coordinated action for the first time, comes as inflationary pressures, partly driven by surging energy prices, start to produce a political backlash, as the world fitfully recovers from the worst health crisis in a century.

Brent crude was down 83 cents, or 1%, to $79.87 a barrel by 0749 GMT, after earlier dropping to $79.28, the lowest since Oct. 7.

U.S. West Texas Intermediate crude futures were down $1.13, or 1.4%, at $77.23 a barrel, having fallen earlier to $77.09, also the lowest since early last month.

Coordinated oil reserve releases “coincide with this virtual meeting between Biden and Xi Jinping. The U.S. wants to arrest inflation and China probably wouldn’t mind seeing a damper on oil prices,” said John Driscoll, managing director at consultancy JTD Energy in Singapore. U.S. crude oil futures & forward prices slump since Nov 1 as U.S. government asked some of the world’s top crude buyers to consider coordinated crude oil sales,

Prices hit seven-year highs in October as the market focused on the swift rebound in demand that has come with lockdowns to halt the coronavirus spread being lifted while the the Organization of the Petroleum Exporting Countries (OPEC) and its allies, called OPEC+, have slowly brought back supply after large cuts last year.

U.S. oil producers have also been reluctant to overspend on drilling after they were punished by investors for gorging on debt to pay for new exploration.

The International Energy Agency and OPEC have said in recent weeks that more supply will be available in the next several months. OPEC+ is maintaining an agreement to boost output by 400,000 bpd every month so as not to flood the market with supply.

“Releasing strategic stockpiles is only likely to lower oil prices temporarily,” said Vivek Dhar, commodity analyst at Commonwealth Bank of Australia. “There’s a good likelihood that markets have already priced in such an event.”

The United States and allies have coordinated strategic petroleum reserve releases before, for example in 2011 during a war in OPEC member Libya.

But the current proposal represents an unprecedented challenge to OPEC, the cartel that has influenced oil prices for more than five decades, because it involves China, the world’s biggest importer of crude.

China’s state reserve bureau  said it was working on a release of crude oil reserves although it declined to comment on the U.S. request.

A Japanese industry ministry official said the United States has requested Tokyo’s cooperation in dealing with higher oil prices, but he could not confirm whether the request included coordinated releases of stockpiles. By law, Japan cannot use reserve releases to lower prices, the official said.

A South Korean official confirmed the United States had asked Seoul to release some oil reserves and it was reviewing the request but added that it could only release crude in case of a supply imbalance.

In its weekly stockpile report, the United States Department of Energy said late on Wednesday that crude inventories fell unexpectedly last week as refineries, enjoying profitable processing rates, ramped up output before the winter heating season.
Source: Reuters (Reporting by Aaron Sheldrick; Editing by Sam Holmes, Michael Perry and Christian Schmollinger)

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