Biden found out that he couldn't depend on OPEC. When will he start to depend on U.S. oil and gas companies and U.S. oil and gas workers? The Biden administration had many successes in starving the U.S. oil and gas industry of capital which was their stated plan when they came into office, and we're starting to see the impact of that, according to the Energy Information Administration (EIA).
In their latest Drilling Productivity Report (DPR), the EIA reported that drilled but uncompleted wells (DUCs) in all U.S. DPR regions hit a record low totaling an estimated 4,283 wells in August 2022, the least in any month since we started estimating DUCs in October 2013. The decline in DUCs in most major U.S. onshore oil- and natural gas-producing regions indicates that more wells are being completed and fewer new wells are being drilled.
The EIA says that:
"Due to continued market uncertainty and limited access to new investment capital, oil, and natural gas producers have focused their spending on existing operations."
Since June 2020, the overall number of DUC wells has steadily declined by an average of 227 DUCs per month during 2021 and by 82 DUCs per month during 2022. ForAugust 2022 (the most recent month available), DUCs totaled 4,283 wells in all DPR regions."
Those market uncertainties and lack of new investment capital fall directly on the shoulders of the Biden administration. When Biden ran for office, he vowed to take away all tax credits for U.S. oil and gas production and threatened to ban drilling and not offer any new leases on federal land. He put on a federal drilling moratorium, and now in his so-called inflation reduction act, that does nothing to lower inflation. He had to cut a deal with Senator Joe Manchin to allow some lease auctions.
On July 2 of this year, the Guardian wrote that Joe Biden's administration on Friday unveiled a five-year offshore oil and gas drilling development plan that blocks all new drilling in the Atlantic and Pacific Oceans within U.S. territorial waters while allowing some lease sales in the Gulf of Mexico and Alaska's south coast. The plan, which has not been finalized, could allow up to 11 lease sales but gives the interior department the right to make none. It comes two days after the U.S. supreme court curbed the power of the Environmental Protection Agency to respond to the climate crisis.
Environmental groups criticized the plan, and some expressed concern that the administration was backing away from the president's "no more drilling" pledge during a March 2020 one-on-one debate with Bernie Sanders. Now the Hill is reporting that the Biden administration is considering auctioning off a smaller section of the Gulf of Mexico for drilling than the Trump administration was expected to, according to new documents released on Thursday. The Interior Department on Thursday released a draft of a "Supplemental Environmental Impact Statement" outlining its plans for the sales of the rights to drill offshore. While a separate Environmental Impact Statement released by the Trump administration called for a "region-wide" lease sale, the Biden administration's document weighs a range of options.
The Biden document does not specify which option it is most likely to choose, opening the door for a possibly smaller lease sale than the Trump administration would have held. The Biden administration is still considering region-wide lease sales encompassing 84 million acres but is giving equal weight to smaller alternatives that would encompass 56 million acres or 27 million acres, respectively. That is according to the Hill.
What's that part about this drilling moratorium on go-for-Mexico leases is the fact that U.S. oil companies can extract oil from the Gulf of Mexico with the least impact on the climate than any other source of energy available. Yet with the ESG movement, the weaponization of the Securities and Exchange Commission against companies for their carbon footprint, and pressuring banks not to lend money to fossil fuel projects is leading us to a world where we're facing a significant supply deficit.
The president's misuse of the Strategic Petroleum Reserve also has created dislocation in global oil prices. The drawdowns of the reserve have put them at the lowest level since 1984 and are only half full, slightly above 50% of total storage, which is misleading in and of itself. Sources that I've talked to at the strategic petroleum reserve don't know what will happen if they continue to draw down inventories. They're concerned about the structural integrity of the salt mines where the oil is stored and about the quality of the oil as they get further and further down in storage. While we may not be at critical levels yet, continued drawdowns for political purposes should be halted at this time.
Yet the president and his party continue to try to blame E.U. S oil and gas industry for his shortcomings. Biden will admit to and be proud of the fact that he has the most anti-fossil fuel president ever in the history of this country.
Oil prices surged as the reality of the OPEC production cuts started to sink in. OPEC's reduction of supply, along with the fact that the Biden administration is going to have no choice at some point to stop releasing oil from the strategic reserve, is creating a void in the marketplace that is causing prices to have significant upside risk. Those risks filter down to products surging. Ultra-low sulfur diesel futures exploded to the upside, its global supplies are tight, and risks to supplies are higher than ever.
In France, a refinery strike is exasperating those fears. Zero Hedge reported that just days after we reported that France had tapped its strategic fuel reserves to resupply a growing number of gas stations that had run dry due to a nearly two-week-long strike of refinery workers, with Government spokesman Olivier Veran urging consumers not to panic-buy only to achieve the opposite results, on Sunday the French Energy ministry announced that almost a third of French petrol (that's gasoline for U.S. readers) stations were experiencing "supply difficulties" with at least one fuel product (up from 21% on Saturday), as French energy giant TotalEnergies offered to bring forward wage talks, in response to union demands, as it sought to end the strike that has pushed French to the brink of a historic energy crisis. Provided the blockades will end. All labor representatives agree, the company proposes to advance to October the start of mandatory annual wage talks," it said in a statement. The talks were initially scheduled to start in mid-November.
After Friday's explosive move to the upside, oil prices are under a little pressure as the dollar continues to surge and inflation fears still permeate the market. But don't be fooled by the recent weakness. The risk to oil is still high on the upside. The market may even be surprised that if the recession is milder, it may not impact demand as much as people think, and if that's the case, you better be prepared for more upside potential. Asian crude imports hit a four-month high. Start getting prepared for the upcoming winter.