The US and Other Nations Tap Their Strategic Oil Reserves

US to Release 50 Million Barrels of Oil

With oil prices soaring to a seven-year high, President Biden announced plans to draw from the country’s Strategic Petroleum Reserve. The US is joining the UK, India, China, Japan, and South Korea in tapping their oil reserves to increase supply and reduce oil prices. This is the first international joint action of its kind.

The US plans to release 50 million barrels from the reserve. As of yesterday, gas in the US cost $3.409 per gallon on average. For a comparison, in 2020 the average price of gas was $2.11 per gallon.

Crude Prices Move Higher on the News

Despite the announcement yesterday, crude prices for future delivery increased. Gas and heating oil prices dipped for several weeks as investors and traders braced for what the Biden administration would do. Now that there is less uncertainty, crude futures are climbing again.

Even if there is a decline in oil prices in the near-term, analysts expect it to be short-lived. Demand for oil is projected to grow in 2022 as the economy continues to recover from the pandemic.

Oil From Reserves Will Not Be Enough to Meet Demand

The six nations plan to increase global supply by 65 million to 70 million barrels. That amount is not enough to meet consumption, which is expected to be more than 100 million barrels per day for the fourth quarter of this year, up 5% compared to a year ago.

The countries releasing oil know this. The decision to distribute oil from reserves is designed more to send a message to OPEC, which has balked at increasing supply.

Tapping the US reserves has become more common, but the move by the six countries is the most significant action taken since 2011. Back then the US and 27 countries released 60 million barrels to address a lack of supply as civil war broke out in Libya. Whether the release will cause OPEC to change its mind and increase supply remains to be seen.

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FedEX and UPS Poised to Handle Holiday Demand

In-Store and Early Shopping to Alleviate Shipping Demand

The holiday rush may be a lot easier than expected for FedEx (FDX) and United Parcel Service (UPS) this year, with more people shopping early and in-store than in 2020. An extra shipping day between Thanksgiving and Christmas is also expected to help the delivery companies meet holiday demand.

This is welcome news to the industry and investors who were bracing for delivery delays. UPS said it feels confident about the holiday season, with 26 of its leading 30 retail shippers running holiday deals earlier than in the past. Consumers are also aware of supply-chain issues and are placing orders earlier, which stretches out the season and reduces the likelihood of delays during peak shipping times.

Deficit Still Persists

For the holiday season, analysts expect the shortfall between the shippers’ capacity and the number of packages to ship to stand at 1.3 million from Thanksgiving until the end of 2021. In the fall analysts had expected that gap to be 4.7 million packages. In 2020 it was about 7.2 million packages.

Strategies put in place by the industry—including adding delivery on Saturdays, shipping more products to stores, and ramping up capacity—have helped. But given that there is still a deficit, albeit smaller, experts say consumers should still get their orders in as soon as possible. FedEx expects shipping to increase 10% during the peak holiday shipping days.

Unanswered Questions

Despite the upbeat outlook, FedEx and UPS are not completely in the clear. Both companies are having a difficult time finding drivers, and may also need to deal with inclement weather and COVID-19 outbreaks. If the number of virus cases increases during the holidays, requiring workers to quarantine, it could create delays. Last year, 14,000 Postal Service workers had to quarantine during the peak holiday period.

Barring any of those issues, with more people venturing out and retailers stocking up early, FedEx and UPS may be in a good position to have a happy holiday.

Black Friday Started Early This Year

Retailers Already Rolling Out Black Friday Deals

The day after Thanksgiving has traditionally marked the kickoff for holiday shopping, when consumers flock to stores in search of bargains. But Black Friday started early this year. Retailers including Walmart (WMT) and Target (TGT) have been rolling out deals since October.

Many of these deals are the same as what consumers will see on Black Friday. In October, retailers started offering discounts of between 5% and 10%. For Black Friday, discounts are expected to be in the 5% to 25% range.

Black Friday had been losing its luster even prior to the pandemic. Ecommerce sales on Black Friday surpassed in-store sales for the first time in 2019.

Ecommerce Steals Black Friday’s Thunder

The popularity of ecommerce surged during the pandemic and many consumers have stuck to their online shopping habits. This year, online sales on Black Friday are expected to increase 5%, hitting $9.5 billion. Retailers are limiting Black Friday store hours and reducing their discounts in response. Demand is high heading toward the holidays, giving retailers little incentive to lower prices.

Walmart and Target are instead investing heavily in ecommerce, making sure consumers can place orders online and pick them up on the same day. This requires a lot of workers to package and deliver curbside orders.

Best Buy’s Strategy Backfires

Extending the Black Friday deals throughout the month alleviates pressure on retailers, freeing them up to focus on their ecommerce initiatives. But this strategy is having a negative impact on some of the companies’ bottom lines. Best Buy (BBY) said that early Black Friday deals, in addition to increasing shipping costs, will hurt its gross margins in the fourth quarter. The electronics retailer is also having a hard time getting ahold of appliances, gaming devices, and smartphones, which is hurting sales.

Black Friday may not be the big sale event it was in years past. That does not mean shoppers won’t be spending this holiday season, but their spending patterns will look different this year, and probably in future years too.