As the global energy market tightens, the Department of Energy has announced plans to repurchase 6 million barrels of oil for the Strategic Petroleum Reserve (SPR). The reserve that has been used and abused by the Biden administration has been a grand experiment in government intervention and market manipulation. While they may have had some success lowering prices in the short run, it has led to chronic underinvestment in the hydrocarbons sector and has caused OPEC and mainly Saudi Arabia to view the US from more of an adversarial relationship. The group sees action by the Biden administration to use the SPR as a political weapon as an existential threat to their economy. While some say the release was justified because of the war in Ukraine, the truth is that the Biden Administration started releasing oil from the reserve long before the war started.
President Biden did vow to make Saudi Arabia a ‘pariah state' and now Saudi Arabia is forming new alliances that can be directly attributable to President Biden's failed foreign policies. Not only did he fail to derail a costly war in Ukraine, Biden's messy go-it-alone Afghanistan pull-out had many of its allies left wondering whether they could trust our country. Maybe some cluster bombs can fix that. Saudi Arabia looked for new allies and moved to join the Shanghai Cooperation Organization (SCO) moving closer to China along with India, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan and Uzbekistan as members. Also, Saudi Arabia was not pleased with actions to put price caps on Russian oil, an idea that was touted by the US but really failed to limit Russian oil exports. And now the SPR oil market placebo is going to come to an end as this week should be the final release from the government-mandated agreement to sell off oil to raise money for the budget. Now the buyback begins, and the market should further tighten.
Yet Javier Blas at Bloomberg points out that we are seeing a new production boom, not in the US but in China. Blas writes that they are “spending billions of dollars via its state-owned energy giants China National Petroleum Corp. (CNPC), China Petroleum (OTC:SNPTY) & Chemical Corp. (Sinopec (OTC:SHIIY)) and Cnooc Ltd., Beijing has been able to reverse the decline in domestic oil production that started in 2015, lifting output this year to a near all-time high. In doing so, the country is somewhat damping the need to buy crude overseas, complicating the efforts of Saudi Arabia and its OPEC+ allies to control the market. From the low point in 2018 to the peak in 2023, China has added more than 600,000 barrels a day of extra production – crude than some OPEC+ nations generate daily. Pumping about 4.3 million barrels a day now, China is again the world’s fifth-largest oil producer, only behind the US, Saudi Arabia, Russia and Canada, and ahead of Iraq. The recovery reflects the high priority Beijing places on energy security, having directed its state-owned companies to lift domestic spending in 2019, when the country launched the so-called “Seven-Year Exploration and Production Increase Action Plans.” China wanted to raise its production because they were getting concerned about becoming too dependent on foreign sources of oil.
Oil markets are pulling back a little bit after its incredible breakout week last week. Data out of China seems to suggest that they’re going into a deflationary environment and it’s raising concerns about the global economy. More than likely if the deflationary trends continue in China, they will be forced to stimulate the economy. That should be bullish for oil and not bearish. Reuters reported that Mexican oil company Pemex estimates that a deadly fire on a major offshore platform off the southern edge of the Gulf of Mexico has led to the loss of 700,000 barrels of crude oil production so far, while one person remains missing, the CEO of the state company, Octavio Romero, said on Saturday. Reports do say that production has come back online except for 100k. Prayers for those who are lost.
Natural Gas is getting a bounce. EBW Analytics says that the NYMEX front-month contract lost ground every day last week as production readings surged higher into early July. While prospects of diminishing supply recently boosted natural gas, the returning gusher of production flipped the nascent bullish narrative lower. Key technical support at the August contract 20-day moving average at $2.568/MMBtu held on a closing basis and could still offer chances for a bounce higher—particularly if heat intensifies. Near-term price risks remain biased in a bearish direction, however.