The Biden administration came into office to try to cancel oil by canceling pipelines and adding a slew of regulations but now it looks like they may have to cancel something else as they try to ease oil prices that have hit the highest level since last October, 2023. Bloomberg News is reporting that the Biden administration is canceling its previously announced purchase back for the depleted Strategic Petroleum Reserve (SPR) because of high prices and because of global supplies that are rapidly tightening. The Energy Report pointed out that when the Biden administration made its last purchase of oil that was above its previously announced target price range of $79.00 a barrel, it was a sign of panic. With the Reserve drawn down to a 40-year low at a time when the geo-political risk factors are at the highest level in 50 years, it will raise more questions about whether the Biden administration prudently used the SPR or did they take a risk taping the reserve before the Ukraine war to get a personal political advantage.
Yet Bloomberg reports that the Energy Department said it was, “keeping the taxpayer’s interest at the forefront” in its decision not to purchase as many as 3 million barrels of oil for a Strategic Petroleum Reserve site in Louisiana. The plan for the barrels to be delivered in August and September had been announced in mid-March.
“We will not award the current solicitations for the Bayou Choctaw SPR site and will solicit available capacity as market conditions allow,” the department said. “We will continue to monitor market dynamics.”
Yet the market dynamics from a political risk standpoint continue to heat up. Diesel cracks soared after reports that Ukraine drones successfully hit Russia’s largest refinery. Diesel also got a boost from Mexico’s decision to not export crude. Ukraine on Tuesday struck one of Russia’s largest oil refineries with a drone attack on the highly industrialized Tatarstan region southeast of Moscow, around 1,300 kilometers, or 800 miles, from the front lines of the conflict according to reports. Russia claimed that operations from the refinery were not impacted while some outside observers believe that it was.
Now Iran is threatening to retaliate after Israel allegedly destroyed an Iranian consulate in Damascus killing a high-level Iranian general is added to the mix of Houthi rebels disrupting global shipping lanes and the potential for more strikes against Russian oil infrastructure.
Also, the President sometimes known as Quid pro Joe now has a quid pro quo offer when it comes to a pause on US LNG export approvals. It seems that Biden may risk the health of the planet in exchange for more money for Ukraine. Reuters reports that, “U.S. officials are open to ending President Joe Biden’s pause on approvals of liquefied natural gas exports to get a Ukraine aid package passed in Congress but want to wait to see the entire proposal before making any decisions, two White House sources said on Tuesday. Biden, a Democrat, in late January, had paused approvals for pending and future applications to export the supercooled fuel after protests about the booming industry from activists concerned about its impact on climate change.”
Of course, the LNG approval pause was never about climate change or saving the planet. The Biden administration did it purely for political purposes. Reports that the Biden administration secretly assured our trading partners in Europe that the LNG export approval pause was nothing to worry about and only done for political purposes. This was an attempt by the Biden team to win brownie points and to appease the environmental left. Now Biden decided to use this as a political bargaining chip to try to get Republicans to move on Ukraine aid. In other words, they created this pause to use as a bargaining chip to get their way politically. It’s just a political game and we’re just merely spectators.
All of this is happening, and it is becoming clear to almost everybody that we are on the precipice of a global oil supply deficit. Global demand is going to hit a record high exceeding our ability to meet that demand based on daily global production levels. And we’re going to start to see that more than likely show up in inventories.
Yesterday it was a bullish trifecta when it came to inventories based on the American Petroleum Institute (API) report. API reported that crude oil supplies fell by 2.286 million barrels which was more than what the street was looking for. We also saw a bigger-than-expected drop in distillate inventories as they fell by 2.548 million barrels. Gasoline inventories also fell by 1.461 million barrels. If we see similar numbers in today’s Energy Information Administration weekly status report, then the market is going to sit up and take notice. Earlier predictions of a so-called supply cut have now reversed and turned into a significant supply deficit unlike anything we have seen for many years.
John Kemp at Reuters points out that, “oil traders anticipate a severe depletion of global oil inventories this summer as OPEC⁺ continues to restrict production and Russia’s exports are disrupted by drone attacks launched by Ukraine. Brent’s six-month calendar spread has traded in an average backwardation of more than $5 per barrel so far in April (96th percentile for all months since 2000) up from 42 cents (43rd percentile) in December. Nearby futures prices for deliveries in June 2024 are rising much faster than for deferred deliveries throughout 2025, a classic signal of a squeeze on deliverable supplies.” That potential for squeeze is another reason why the Biden administration had to reverse course on their goal to refill the SPR that Energy Secretary Jennifer Granholm said that they wanted done by the end of this year. That looks even more impossible than when she said it.
An interesting side note, there were reports that oil traders for Saudi Aramco and Houston staged the walkout over a dispute on their bonuses. Perhaps they could move to California because I hear that fast food workers are earning $20.00 an hour there.
Oil also got a boost when at least one Fed official said they believe that interest rate cuts – possibly three – are still on the table. The Feds’ Mary Daly said that three rate cuts this year are reasonable assumptions. This offset concerns that stronger economic data will derail all interest rate cuts.
Overnight euro zone inflation came in softer than expected which is going to make the Fed’s decision very interesting. The ADP jobs report today and the jobs report on Friday could be a major factor in moving the dollar treasury bonds and ultimately oil. Yet oil seems to be a bit divorced from some of the outside forces mainly because of the potential for a coming supply squeeze.
Talk of a possible lift of the export review for LNG might be welcome news for natural gas producers that currently are substantially reducing production because of low prices. Daily US natural gas production has started to plummet. It’s hard to to avoid the massive supply glut now with the last of winter making an appearance into April. It may also give the market some support from a seasonal viewpoint we usually get a bounce in the futures price at this time of year so for natural gas producers I guess hope springs eternal though there are going to be significant challenges going forward.