With everyone obsessed with British lettuce and the Fed blowing up the US economy, there wasn’t enough digital ink to discuss the supreme irony of Biden releasing another release of oil from the medium-term oil reserves and… the oil boom. Unfortunately for the increasingly confused president, this is just the beginning.
On Wednesday, Amrita Sen, co-founder and director of research at consultants Energy Aspects, said on Bloomberg TV that the market is likely to lose Russian barrels in December as EU restrictions on imports and transportation could deter tanker owners from transporting crude from that country.
As a result, oil prices”are going to be well over $100” in December as short-term prices come under pressure from strikes in France and lockdowns in China that suppress demand. However, once these dissipate, Europe will have to stop importing 1 million to 1.5 mb/d of Russian crude when the embargo on maritime shipments comes into force in December; these barrels – as Zoltan Pozsar explained in March and April – will need to be shipped to more distant markets with transit times of 30-50 days compared to only 3-4 days for Europe, leading to increased costs and significant delays.
Separately, if shipowners decide the risk of sanctions is too high to move Russian crude”you will lose some of the navigation and it will tie up more oil.
This reminds us of something Goldman flow trader Rich Pvorotsky wrote in this morning’s market summary (available for pro subscribers)when we warned that it is”are increasingly worried about the supply of the oil market beyond the intermediate deadlines. This EU proposal does not allay my anxiety because the proposed oil cap could have quite significant consequences on the shipping market “Here is why, as Bloomberg noted earlier:
“In the event that a vessel flying the flag of a third country has transported Russian crude oil or petroleum products purchased at a price above the ceiling price, it should be prohibited to provide technical assistance, brokerage services, financing or financial assistance, including insurance, related to any future carriage by this vessel of crude oil or petroleum products”
This will definitely trigger a deep chilling effect on the entire industry.
But what about Biden’s SPR drain – is it really that useless, and won’t it at least help a little? Well, according to Sen, limits on how low stocks can be pulled mean sales won’t be as big as some expect (analysts expect a release of up to 100 million barrels; with 26 million barrels to be released between December and February).
But the clearest explanation why Biden’s latest SPR release won’t do, comes from Goldman’s commodities strategists led by Jeff Currie who issued a note late Thursday (and also available for pro subscribers), in which they write the following:
Following OPEC+’s surprise 2mb/d cut on October 5, the Biden administration was quick to implicate a political response, concerned about the November 8 mid-term spike in gasoline prices. On October 18, the White House released an energy policy. The speech highlights various concerns ahead of President Biden’s speech and the steps taken by the administration to “strengthen energy security, encourage production and reduce costs.”
The 15MB SPR levy (the final installment of the 180MB spring announcement) made headlines, but most interesting was the plan to reload the SPR at fixed prices for future delivery “at or below around $67-72/barrel”, offering some support for crude prices below the “band of shale‘. This truncation of the price distribution should encourage investment in output growth – if only marginally. We find that US marketing and refining margins are high, but the latter is a function of exorbitant international energy prices as well as structurally tight refining markets.
Additional headlines since the OPEC+ meeting have highlighted other policy options available to the administration. We believe additional SPR sales are the most likely action (16MB available as of FY2023 Congressional Mandated Sales), even if it remains price-dependent: demand higher prices than currently, and likely closer to $125/bbl after the mid-terms. However, such a release is likely to have only a modest influence (<$5/bbl) on oil prices.
Related: Supertanker tariffs soar as Chinese refiners increase imports
All options have tradeoffs. Product export bans, in particular, could push up global wholesale distillate/gasoline prices by $150/$50/bbl respectively (to $300/$150/bbl) and still risk shortages and higher prices on the domestic market – especially in coastal regions. All the answers leave the ultimate cause of energy underinvestment unanswered.
We continue to expect the midterm elections next month to dominate the headlines as the US administration attempts to exert downward pressure on retail prices. However, we believe action at current price levels remains unlikely. This political reflexivity is reflected in our current forecast ($115/bbl of Brent in 1Q23), as the deficits we anticipate, following the OPEC+ decision to cut, look unsustainably bullish given the scarcity of stocks and the our prospects for balance. The risk of inventory depletion and price spikes necessitating demand destruction as a rebalancing of last resort could drive prices up another $30+/bbl.
There’s more in Goldman’s comprehensive reports, including an analysis of why a product export ban will exacerbate the global shortage of refining capacity, why a federal gasoline tax holiday would have a modest impact, why easing sanctions against Venezuela is not a quick fix, and why the “NOPEC” bill has only very limited benefits.
By Zerohedge.com
More reading on Oilprice.com:
#Oil #Climb #Midterm #OilPrice.com