In its latest FundamentalEdge report released last week, Enverus Intelligence Research confirms that nearly three months into the Ukraine war, oil markets remain tight despite the Biden administration’s ongoing major drawdown of the U.S. Strategic Petroleum Reserve (SPR).
“We see a tangible risk that oil markets will become volatile again later this year and into 2023 when the stock releases end. The release of oil from the Strategic Petroleum Reserve buys time for producers in the U.S. to push harder and for Iran nuclear diplomacy to bear fruit,” said Bill Farren-Price, lead report author and director of Enverus Intelligence Research.
The return of volatility anticipated by Enverus appears to have arrived a little early. As summer driving season set in over the weekend, crude prices shot up again in Memorial Day trading, with Brent now topping $123 per barrel and West Texas Intermediate trading at over $119 as of this writing on May 31. These are the highest levels seen since March 8, when Brent briefly topped $129 before closing at $127.98.
That price spike led President Joe Biden to announce a major new drawdown of the U.S. Strategic Petroleum Reserve a few weeks later, on March 31, in an effort to moderate crude prices, which have been driving up the price of gasoline in the U.S. In announcing the drawdown of 1 million barrels per day for 180 days starting on April 1, Biden said he expected oil prices to fall “and continue to come down” in response. Energy Secretary Jennifer Granholm praised the President for using what she termed “the biggest tool that we have in our arsenal, which is the Strategic petroleum Reserve.”
What has happened instead since April 1 is that, following a brief drop, crude oil prices have again been on an inexorable rise as the market remains in an under-supplied situation for a variety of reasons. One of the main reasons has to do with the ongoing failure/inability of the OPEC+ nations to meet their export quotas under their ongoing cartel agreement.
Josh Young, Chief Investment Officer of Bison Interests, an energy investment fund, published the chart above, which shows the OPEC+ deficit reached 2.59 million barrels of oil in April, by far its highest monthly level. Since January of last year, the average OPEC+ delivery deficit has amounted to .94 million barrels per day.
Of course, a big piece of the current OPEC+ delivery deficit has been the ongoing reduction in exports by Russia, due in large part to increasing sanctions imposed by the U.S. and other countries. The governments of the European Union recently concluded their long debate over potentially imposing sanctions of their own, but ended up with a soft plan to end Russian imports by 2027.
The stark reality for OPEC+ as a group is that most member countries simply lack the capacity to increase exports due to declining reserves and years of under-investment in exploration efforts. Among the non-Russia nations, only Saudi Arabia and the United Arab Emirates appear to still possess significant excess supply capacity.
With the Biden administration having already deployed what Granholm says is its biggest weapon to influence crude prices, this would leave the U.S. shale industry as the other nominal swing producer with the ability to significantly and quickly increase supply. But outside of Texas, that isn’t really happening. Texas has the good fortune to be home to very few federal lands, and as a result the Biden administration has little ability to impede the industry’s progress there.
But in other big oil producing states and federal waters, the administration’s efforts to restrain domestic producers have been quite successful. Despite that reality, the U.S. industry is on track to increase domestic oil production by about 1 million barrels of oil per day during 2022, a significant rise but far from the 2 million barrels per day of new supply it was able to add during 2018/2019.
This all leaves U.S. consumers, already struggling with record-high gasoline and diesel prices, with really no price relief in sight. The market is chronically under-supplied and there is little prospect that situation will be resolved soon absent a significant global economic recession which would kill demand. That’s a ‘solution’ which is worse than the problem.
In fact, prices could potentially escalate even more rapidly when the Biden SPR drawdown concludes at the end of September and the Administration will have to begin re-purchasing crude volumes to replenish the highly-depleted reserve. Some analysts are already expecting the Brent price could hit $150 by the end of summer, which would equate to a national average price for regular gasoline of about $6.00 per gallon. This all leads to questions about what will happen when the U.S. government starts its inevitable buy-back program, effectively removing more barrels from the market.
The answer to that question seems readily apparent, doesn’t it? Prices will keep rising for the simple fact that they have nowhere else to go.