The recent jump in oil prices to the highest price since October last year was blamed for two reasons: an unexpected drop in US crude oil production and the Russian government's order for the country's oil companies to reduce crude oil production in the second quarter. The latter came as a surprise to many because although the reason Russia claims is to ensure that it meets its production target of 9 million barrels per day by the end of June to meet OPEC+ commitments, Russia has never made a fuss about breaking OPEC+ commitments before, until now. Why this shift?

Some analysts pointed out that for every sudden increase in the cost of crude oil by one dollar, Biden's approval rating will drop by at least 1%. Just as Biden can and has weaponized the dollar, Putin can use crude oil to do the same thing.

On Wednesday, J.P. Morgan noticed this strange shift in Russia. The bank's commodity expert Natasha Kaneva (Natasha Kaneva) wrote in a report that Russia promised to cut production by a total of 4.71 million b/d in early March, bringing the country's production to 9 million b/d in June, which was “contrary to her expectations.”

She went on to say, “When Russia announced this news, we felt its commitment was sincere. A Reuters report on Monday confirmed this view. The Russian government has ordered its domestic companies to reduce production in the second quarter to ensure they reach their production target of 9 million b/d by the end of June and abide by their commitment to OPEC+.”

J.P. Morgan concluded that “the shift in Russia's oil strategy is surprising” and “on the face of it, assuming no policy, supply, or demand response, Russia's actions could push Brent crude oil to reach $90 in April, to around $95 in May, and close to $100 in September, putting pressure on the Biden administration before the US election.”

In other words, Putin can single-handedly crush Biden's chances of re-election by returning oil prices to three digits and returning gasoline to 4 US dollars or even 5 US dollars/gallon. In fact, J.P. Morgan warned that US gasoline prices could climb to $4/gallon by May, the highest level since summer 2022. Furthermore, this increase “may be further amplified by the possibility that OPEC+ will extend its production cuts until the end of the year in June.”

What is certain is that Biden will not fall without a fight. As Kaneva reminded, the lesson from the 2022 energy crisis is that Biden “has a variety of measures that can be quite effective in mitigating the impact of high oil prices”. The rebalancing mechanism with the most obvious effect in the short term is to once again release strategic oil reserves.

The J.P. Morgan strategist pointed out that although America's reserves have declined, they are still sufficient to meet strategic needs and provide a buffer against price shocks. She wrote, “We estimate that the US government has policy space to release up to 60 million barrels of crude oil. If spread over four months, it will increase the supply of crude oil by 500,000 barrels per month. ”

In addition to directly impacting the supply side, disrupting demand is another powerful response. J.P. Morgan's view is that given the strength of the US dollar and high borrowing costs, oil prices significantly above $90 could seriously damage global oil demand, as was the case from March to June 2022 and September to October 2023, leading to a drop in prices.

For a pricing market that will continue to pursue active easing after Biden's election, this means that Biden will face a choice: either lower oil prices, but at the cost of a sluggish market and further economic slowdown, or force Powell to cut interest rates, causing all inflation hell to break out in the second half of 2024.