Released April 06, 2022 | SUGAR LAND
en
Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The pending addition of another 1 million barrels per day (BBL/d) from U.S. strategic reserves is under the microscope of analysts wondering if the consequences of the Russian invasion of Ukraine are too much to overcome.
So-called "self-sanctioning," the reluctance of some companies to take on Russian products for fear of getting stuck with untradeable goods, and Western pressure on the Kremlin's pocketbook--namely, energy--could strand as much as 3 million barrels per day of crude oil.
That comes at a time when global storage levels are undersupplied. For the week ending March 25, for example, the U.S. Department of Energy said commercial storage held 409.9 million barrels, about 14% below the five-year average for this time of year.
Washington last week tried to offset the supply-side crunch by pledging to put another 1 million BBL/d from the Strategic Petroleum Reserve (SPR) on the market for the next six months starting in May, the equivalent of another Libya. That works out to be a 180 million-barrel commitment from the U.S. government.
The initial response to the announcement was as the White House intended. Months of supply-chain bottlenecks, a workforce reluctant to take jobs in some service sectors, and resurgent demand in the post-vaccine stage of the pandemic helped push inflation to record highs. By late last year, that inflation was eating into discretionary spending, the lifeblood of any capital economy, by way of higher prices at the pump.
Putting more barrels on the market would ostensibly offset that as the bulk of what consumers see at the gas station is a reflection of crude oil prices. The price for Brent crude oil, the global benchmark for the price of oil, slumped 8% after the White House announced its plans for the SPR.
But that was last week. Brent was up some 4% over the first two trading days of the week and analysts are second-guessing whether the SPR release was enough.
"The announced release of 180 million barrels has failed to rock the boat apart from a two-day sell-off," wrote Tamas Varga, an analyst at London oil broker PVM. "The price recovery that started Friday afternoon suggests that strategic stocks, in their current form, are not fit for purpose and fail to provide energy security."
Varga nonetheless points out that what's left in U.S. strategic reserves would still ensure enough domestic supply to shield the economy from another emergency. That wouldn't have been the case before the U.S. shale oil boom, when the economy was heavily dependent on foreign reserves.
Varga, however, argues the nature of the sale means it may be financially burdensome to refill stockpiles that are necessary for energy security.
The idea is to refill the SPR when crude oil hits $80 per barrel. But in a higher-for-longer scenario for crude oil prices, it could be several years before crude trades at that level again. That would leave the federal government, and taxpayers by proxy, covering the balance.
"It would have probably made more sense to release the oil in the form of a swap deal, whereas the Department of Energy would have lent the barrels to oil companies and refiners who would have been requested to return them in, say, 12 months," Varga added.
A note from Swiss investment bank UBS, meanwhile, takes a longer view, noting that chronic underinvestment in upstream activity meant the market was ill-prepared for any major supply-side shocks, even with the tacit addition of another Libya.
"The U.S. SPR release may alleviate some market tightness, but it won't resolve the structural imbalances resulting from years of underinvestment at a time of recovering global demand for oil," the bank stated.
Underinvestment has been an underlying criticism for barrel counters. Capital discipline was lacking recently for shale producers, while shareholders and activist investors pressed for an accelerated energy transition. That meant investments were going toward things such as hydrogen and carbon sequestration technologies, rather than new oil. And even if drillers chased the bull run for commodities, it would be several months before more oil shows up on the market.
That leaves the global economy looking to the likes of Iran, an unsavory ally for many Western powers, for more oil. Venezuela, another less-than-desirable partner, could see some sanctions relief in an effort to bring more barrels to the market. Canada, the top foreign supplier of oil to the U.S. economy, could deliver more given that its export capacity is limited to North America.
Even still, for UBS, the 1 million BBL/d of unexpected oil does little to address lingering supply-side issues that preceded the war in Ukraine.
"We still expect the oil market to be undersupplied this year," UBS said.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
So-called "self-sanctioning," the reluctance of some companies to take on Russian products for fear of getting stuck with untradeable goods, and Western pressure on the Kremlin's pocketbook--namely, energy--could strand as much as 3 million barrels per day of crude oil.
That comes at a time when global storage levels are undersupplied. For the week ending March 25, for example, the U.S. Department of Energy said commercial storage held 409.9 million barrels, about 14% below the five-year average for this time of year.
Washington last week tried to offset the supply-side crunch by pledging to put another 1 million BBL/d from the Strategic Petroleum Reserve (SPR) on the market for the next six months starting in May, the equivalent of another Libya. That works out to be a 180 million-barrel commitment from the U.S. government.
The initial response to the announcement was as the White House intended. Months of supply-chain bottlenecks, a workforce reluctant to take jobs in some service sectors, and resurgent demand in the post-vaccine stage of the pandemic helped push inflation to record highs. By late last year, that inflation was eating into discretionary spending, the lifeblood of any capital economy, by way of higher prices at the pump.
Putting more barrels on the market would ostensibly offset that as the bulk of what consumers see at the gas station is a reflection of crude oil prices. The price for Brent crude oil, the global benchmark for the price of oil, slumped 8% after the White House announced its plans for the SPR.
But that was last week. Brent was up some 4% over the first two trading days of the week and analysts are second-guessing whether the SPR release was enough.
"The announced release of 180 million barrels has failed to rock the boat apart from a two-day sell-off," wrote Tamas Varga, an analyst at London oil broker PVM. "The price recovery that started Friday afternoon suggests that strategic stocks, in their current form, are not fit for purpose and fail to provide energy security."
Varga nonetheless points out that what's left in U.S. strategic reserves would still ensure enough domestic supply to shield the economy from another emergency. That wouldn't have been the case before the U.S. shale oil boom, when the economy was heavily dependent on foreign reserves.
Varga, however, argues the nature of the sale means it may be financially burdensome to refill stockpiles that are necessary for energy security.
The idea is to refill the SPR when crude oil hits $80 per barrel. But in a higher-for-longer scenario for crude oil prices, it could be several years before crude trades at that level again. That would leave the federal government, and taxpayers by proxy, covering the balance.
"It would have probably made more sense to release the oil in the form of a swap deal, whereas the Department of Energy would have lent the barrels to oil companies and refiners who would have been requested to return them in, say, 12 months," Varga added.
A note from Swiss investment bank UBS, meanwhile, takes a longer view, noting that chronic underinvestment in upstream activity meant the market was ill-prepared for any major supply-side shocks, even with the tacit addition of another Libya.
"The U.S. SPR release may alleviate some market tightness, but it won't resolve the structural imbalances resulting from years of underinvestment at a time of recovering global demand for oil," the bank stated.
Underinvestment has been an underlying criticism for barrel counters. Capital discipline was lacking recently for shale producers, while shareholders and activist investors pressed for an accelerated energy transition. That meant investments were going toward things such as hydrogen and carbon sequestration technologies, rather than new oil. And even if drillers chased the bull run for commodities, it would be several months before more oil shows up on the market.
That leaves the global economy looking to the likes of Iran, an unsavory ally for many Western powers, for more oil. Venezuela, another less-than-desirable partner, could see some sanctions relief in an effort to bring more barrels to the market. Canada, the top foreign supplier of oil to the U.S. economy, could deliver more given that its export capacity is limited to North America.
Even still, for UBS, the 1 million BBL/d of unexpected oil does little to address lingering supply-side issues that preceded the war in Ukraine.
"We still expect the oil market to be undersupplied this year," UBS said.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
