The US decision to release 180 million barrels of oil will help offset the loss of Russian supply and keep prices steady, JPMorgan says

• The US releasing oil from its emergency reserve will help stabilize prices this year, JPMorgan says.
• Even if the US unlocks less than its target of 1 million barrels of oil a day, it would still help balance the market and steady oil prices.

The US plan to unlock an unprecedented amount of oil supply will aid in balancing the global oil market and keep prices steady in 2022, JPMorgan said Friday. But the firm also warned that a larger-than-expected loss in Russia's oil supply could kick crude prices up again next year.

The US plans to release 1 million barrels of crude oil every day from the Strategic Petroleum Reserve for the next six months, a move President Joe Biden called "a wartime bridge" to increase oil supply until production increases later this year to meet the demand for the commodity. Biden moved to address Americans paying near record-high gas prices after Russia's invasion of Ukraine in late February spurred fears of a worsening supply shortage and drove oil prices above $100 a barrel.

The planned release from the SPR equates to about 180 million barrels of oil that are set to enter the market.

JPMorgan said in a research note that it doesn't foresee the Energy Department releasing as much oil as the US government is targeting. However, what's likely to be released, combined with other pending adjustments in the oil market, should result in a balanced market this year. The investment bank left unchanged its oil price forecasts at $114 a barrel in the second quarter of 2022, and $101 a barrel in the second half of this year, with prices rising over $120 in the interim.

Balancing act

Insufficient bids and infrastructure constraints will likely lead the Energy Department to release only 850,000 barrels of oil a day from the SPR, missing the target of 1 million barrels a day, said the investment bank. Meanwhile, the US tapping its emergency reserves suggests there will be a delay in Iran bringing its own crude oil into the global market.

The bank backed its view by pointing to the US Treasury Department's announcement Wednesday of new sanctions against Iran's ballistic missile program. The US is still working to reach a nuclear deal with Tehran that could result in Iran's return to the wider global oil market.

"We still expect the deal to cross the line given it is a key policy goal of the administration, but now assume that Iran begins delivering volumes from floating storage and increasing output starting in July 2022," Natasha Kaneva, head of global commodities research at JPMorgan, said in the research note.

The global oil market has been facing strong demand in part as COVID restrictions have largely waned worldwide. But there are signs of slowing, JPMorgan said in lowering its first-quarter 2022 demand outlook by 500,000 barrels of oil a day on fresh data from the US and Japan. In the US, it said surging gas prices have contributed to hurting fuel demand despite March marking the start of the driving season.

Accounting for recent trends in fuel demand, the bank now expects 2022 total oil demand to grow 3 million barrels a day year over year to average 100.5 million barrels a day, which is "only" 90,000 barrels a day above 2019 levels.

Russian risk

While the mix of the SPR release, the likely delay in Iranian exports, and slower demand should balance the market this year, Russia's output picture remains a risk, JPMorgan said.

"Crucially, we recognize that a release of oil inventories is not a persistent source of supply and if stranded Russian barrels average more than 1 mbd next year, this will leave 2023 in a deep deficit, rendering our $98/bbl price forecast for the year too low," with the idea that supply shortages put upward pressure on oil prices.

JPMorgan said its base case assumes the drop in Russian oil exports recovers from a loss of 2 million barrels a day in April, and a "perpetual" 1 million barrels daily after that. The risk, it said, is that the medium-term loss could be up to three times as high as its estimate. "Based on public [European Union] statements, we estimate that as of today, intentions are in place to diversify 2.7 mbd or almost 80% of Russian oil imports," said JPMorgan.

Oil prices pulled back after Biden's SPR announcement. West Texas Intermediate crude last week fell slightly under $100 a barrel and Brent crude, the international benchmark, on Friday hit an intraday low of around $102 a barrel, the lowest price since March 17.