Joe Biden is running out of options. Already there are signs that his release from the Strategic Petroleum Reserve (SPR) will fail to have his desired effect on prices. Why are we not surprised? Is it because almost everything Biden has done has been a failure, or is it just the laws of supply and demand? Even a pledge by the International Energy Agency to join into the madness by adding 120 million barrels to Biden’s announced 180 million barrels release is not enough to cool down prices. Then the question becomes: what will this administration do for an encore. What if there is a real emergency? Oh yeah, that’s right. Blame the oil companies.
John Kemp at Reuters points out that U.S. petroleum inventories, including the strategic petroleum reserve, have fallen by 411 million barrels since July 2020 after increasing by 225 million barrels during the first wave of pandemic and lockdowns. Kemp says that inventories have fallen in 68 of the last 91 weeks. The drawdown confirms the global market has been persistently under-supplied for almost two years.
Kemp says that historically, market analysis has treated U.S. government-controlled stocks as purely strategic and passive and has therefore focused on inventory changes excluding the SPR. But as the SPR comes to be used more actively to manage prices, the focus will switch to inventories, including the SPR, providing the best indicator of the balance between production and consumption. In other words, you have to look at the SPR as fair game for being used at any time. In other words, the reserve is no longer strategic and is just Biden’s personal political capital slush fund.
Saudi Arabia is looking at this Biden crisis as an opportunity. The Saudis raised their OSP oil prices by a historical amount, encouraging buyers to look to the U.S. for supply. They want to drain the U.S. off oil inventory, and that should make us more dependent on the kingdom for oil in the future but at the same time leave our economy vulnerable.
Reuters said that Saudi Arabia, the world’s top oil exporter, raised crude prices for all regions, with those to Asia hitting all-time highs as disruption in Russian supplies support prices, according to a pricing document seen by Reuters on Monday. State oil producer Saudi Saudi Aramco (SE:2222) raised its May official selling price (OSP) to Asia for its flagship Arab light crude to $9.35 a barrel above Oman/Dubai crude, the grade’s highest premium ever.
There is growing pressure on oil and gas addicted Europe to get off of Russian oil and gas despite the huge economic risks that come with that. Oil prices are also getting a boost as the war atrocities reports come out of Ukraine. Bloomberg reports that the European Union is planning to propose a mandatory phase-out on coal imports from Russia in direct response to reports that Russian forces committed apparent war crimes in Ukraine, according to people familiar with the matter. That was after U.S. coal prices topped $100 a ton for the first time in 13 years as Russia’s war in Ukraine upends international energy markets, and an economic rebound from the pandemic drives up demand for fossil fuels.
According to government data released Monday, prices for coal from Central Appalachia surged 9% to $106.15 a ton last week, the highest since late 2008. Bloomberg says that prices in the Illinois Basin rose to $109.55, topping $100 for the first time in records dating to 2005.
Tonight, we get the American Petroleum Institute (API) report that should show another crude draw. SPR oil is being burned up in the atmosphere and should set the stage for future supply shortfalls. The Saudis are laughing all the way to the bank.
Gasoline demand destruction seems to be modest, so gasoline looks like it is bottoming. Enjoy that gasoline price break at the pump because it will not last. Distillates are still the soft spot. We have a real shortage.
Get hedged. Seasonal factors favor long products and short crude.