The Biden administration is now talking about another release from the Strategic Petroleum Reserve, just in time for the mid-term elections. Rumors are circulating that they plan to release 10 million to 15 million barrels of oil.
The Biden administration claims they are doing this to lower gasoline prices, but the reality is that gasoline prices are still a lot higher than they were when they started to release oil from the reserve in the first place. Yesterday, I alluded to the movie, “The Little Shop of Horrors,” where the main character, Seymour, had to feed a little blood to a plant from outer space that he named Audrey 2. As it grew, it wanted more and more and more. That is a perfect analogy to Biden trying to control global oil prices with releases from the reserve. You might satisfy the market for a while, but you have to continue to keep feeding the planet, or market, until you run out of blood or oil. “Here, maybe I can squeeze a little bit more out of this finger.” Feed me!
The reality is that the Biden administration is using the reserve as a political response as Americans are waking up to the fact that Biden’s energy policies are responsible for rising gasoline prices. This is not a new thought by The Energy Report. As we said, voting for Biden would be a vote for higher gasoline prices. At the time, those views were dismissed by so-called fact-checkers and some analysts. Yet, it’s clear those projections have come true. Now, as we look forward Biden, of course, can blame OPEC and blame oil companies. He can also blame the war in Ukraine, which he will. The administration will not point out that the war in Ukraine happened on his watch and was a major failure of diplomacy on his part. Military experts generally agree that the ill-fated pullout from Afghanistan emboldened our enemies Russia and increasingly China.
Now, the Biden administration expects U.S. taxpayers to foot the bill by releasing more oil from the reserve in an ill-fated mission that will eventually cause the global oil markets to tighten even more. His plans will discourage investment and, ultimately, lead to higher prices.
The Biden administration also is putting forth the plan to buy back oil from the strategic reserve. Former President Donald Trump, when oil prices were near historic lows, wanted to buy oil from the reserve but was blocked by the Democrats who said it was a bailout for big oil. Trump proposed to buy $3 billion worth of oil. At the time, buying $3 billion worth of West Texas Intermediate crude would have brought in 122.5 million barrels for the Strategic Petroleum Reserve at $24.49 each. Yet, where is the Democrat outrage now the Biden administration plans to buy oil back at the reserve at elevated prices at a much higher price than the reserves were purchased in the first place? CNN reports that Biden will announce what the administration intends to repurchase crude oil for the emergency reserve when prices are between $67 and $72 per barrel. Good luck with that.
The other proposal that the Biden administration is flirting with is a possible oil and product export ban or export restrictions. That move could cause U.S. prices to crash but it would also cause U.S. oil and gas production to crash. That would accelerate global shortages and push the world closer to economic collapse. It also means that if we have to buy back oil for the reserve, it’s going to come from OPEC if we’re producing less. The OPEC cartel isn’t likely going to be very friendly when it comes to dealing with the United States. The Biden administration is not very good at winning friends and influencing people, especially when it comes to geopolitics.
By extending the Strategic Petroleum Reserve releases, the Biden administration could put off a situation where U.S. supplies plummet. Just based on simple math, U.S. supplies would have plummeted without these strategic releases but that might have inspired more production and it might have then been the reason why OPEC would not be cutting production at a time when the world needs more oil. Biden’s intervention in the global oil markets with Strategic Petroleum Reserve releases was short-sighted and is going to create bigger problems for the U.S. taxpayers down the road.
Even with the reserve releases, we got a very bullish American Petroleum Institute’s (API) report yesterday. The API reported drawdowns across the board led by a 2.17-million-barrel drop in unleaded gasoline supplies followed by a 1.27-million-barrel drop in crude oil supplies and distillates.
The ultra-low sulfur distillate diesel had an incredible range yesterday. The market surged before plummeting late in the session as historic volatility has come to the ultra-low sulfur distillate market. Critically low inventories suggest that the only way to have enough supply to get through winter may be a major economic slowdown. When it comes to distilling, how high can prices go before demand destruction sets in? With Europe needing more supply to keep the lights on and a shortage of heavy oil to produce it, we’re going to continue to have a significant risk of moving higher, but at the same time more volatility like we saw yesterday.
Natural gas prices plummeted as a fortunate weather scenario along with maintenance on LNG export facilities have given the market a much-needed bill open. EBW Analytics reports NYMEX natural gas plunged to fresh three-month lows after a bearish weekend weather shift helped to crack resilient support near $6.30/MMBtu. Fundamentally, October 2022 is now on pace for the largest October injection in history following on the heels of a record-setting September monthly build. Near-term fundamental weakness is likely to persist through the end of October and into early November. Over the next 30-45 days, however, LNG demand could press higher and bearish weather could turn notably cooler. Low storage inventories and prices nearing the lower end of the price-inelastic portion of the demand curve suggest continued susceptibility to upside risks. If DTN’s forecast for a cold December materializes, NYMEX futures could surge.
Obviously, when it comes to natural gas, weather is the key and you can’t control Mother Nature. There are some out there who don’t understand the difference between speculation and hedging. We have been telling people that they should be hedged going into winter in recent weeks. The weather has allowed some major storage builds along with some very strong production numbers, but even with these record-breaking increases in supplies, there are still significant risks when the LNG export terminals start to reopen. If we do get cold weather, we agree with the EBW Analytics, there are significant upside risks, and that’s why you should be hedged. Those we recommended being hedged on diesel and gasoline are very happy that they’ve done just that over the last couple of months. That’s especially true of distillate.