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One of Rigzone’s regular market watchers takes a look at the US debt ceiling talks, the latest developments from the US Department of Energy, an upcoming West Texas Intermediate (WTI) oil price battle and more. Read on for more details.
Rig zone: What were some market expectations that actually played out over the past week, and which expectations didn’t?
Barani Krishnan, Senior Commodity Analyst at uk.Investing.com: Well, everyone expected some tension and drama from the US debt ceiling talks, and we certainly got some of that to depress oil. But the relatively quick cooling of that heat on Wednesday by both President Joe Biden and his main Republican challenger Kevin McCarthy, which helped oil return to positive territory for the week, was so unexpected.
The week’s other notable, mouth-opening, development was the announcement by the Department of Energy that it will finally buy 3.0 million barrels to begin filling the US Strategic Petroleum Reserve. While the rebuilding of oil stockpile in the world’s largest economy should have led to a big upward push in crude oil prices, the market went the other way on this news.
Rig zone: What were some market surprises?
Krishnan: It was the proclamation oil had been waiting for since President Biden authorized the release of the first barrel of SPR crude in November 2021. Eighteen months and nearly 250 million barrels later, the most withdrawn from the reserve in its five decades, the Biden administration says it’s ready for a recharge.
In a news release issued Monday, the Energy Department said it will buy up to three million barrels initially for the SPR under what it described as a “three-part replenishment plan.” Oil bulls, of course, care about nothing more than: How many barrels will eventually be bought and for how long? At this time, the department did not respond to either. Logic, however, suggests that the first round of purchases will begin after the current congressionally mandated sales of the SPR, which expire in June, are exhausted.
However, the department offered three points of guidance. He said they “intend to buy more oil later this year.” Acquisitions will include outright purchases and loan barrels, which will include a premium when returned. It also said it has canceled 140 million barrels of mandatory SPR sales scheduled for fiscal years 2024 to 2027.
That last part was probably more academic than anything else, since no one, not even President Biden’s closest allies, would expect the SPR sweepstakes to continue for the next four years, not when the balance of the reserve is already at its lowest level since 1983. With just over 362 million barrels in the reserve, it will take just over 82 days to fully extract it at a peak extraction rate of 4.4 million of barrels per day (although the norm for withdrawal has been one million barrels per day).
With Monday’s unveiling of the administration’s plans for the SPR, one of the oil market’s most anticipated announcements in the past year and a half landed with a thump instead of the thump that oil bulls had been hoping for. .
Some points to think about why SPR recharge plans are not so great right now for crude oil prices:
- We only have this three million barrel purchase announced by the DOE and their intention to buy more later this year. At this time, no one outside the administration knows the number of barrels it plans to acquire. There is no telling if even the administration knows how much it will buy.
- What we do know is that the reload will likely be decided by one thing and one thing only: the price of crude oil. The administration said late last year that its goal was to replenish the reserve when prices were at or below $67 to $72 a barrel. It wouldn’t be wrong to think that if the market goes beyond that, the DOE will just cancel more purchases. It’s good to think that the administration will refill barrel by barrel what it took out. The truth is that it can reach 20 percent, then stop because the price is no longer advantageous for storage. If the market yearners think that the administration can be held to a ransom to completely fill the reserve, they better think again.
- The thinking within the DOE is that the SPR is probably not needed as much these days as it was 50 years ago. As a strategic buffer, its importance cannot be denied. But nowadays there are many other ways to get the necessary oil.
While Western sanctions on Russia are undoubtedly the main source of oil supply losses, apart from OPEC+ production cuts, global crude production has started to recover from worst disruptions of the pandemic era. Russia exports and produces large volumes of crude oil, cheating on its pledge to Saudi Arabia, a key OPEC+ ally.
In North America, despite ongoing wildfires and occasional pipeline problems, Canada remains a stable source of crude oil supplies to the United States, providing just over half of US needs. US domestic production has also settled around 12 million barrels a day, nearly a million below its three-year record high. U.S. shale oil production will actually rise to a record high in June, the Energy Information Administration, a unit of the energy department, said in a forecast.
Outside the United States, Iraq’s production is expected to grow by 25 percent over the next five years. Iran’s oil exports are reportedly at their highest since 2018 despite Trump administration-era sanctions. In Venezuela, Chevron will begin a new phase of increased production next month.
And last but not least, Guyana’s oil exports increased by 164 percent last year. Rystad Energy also estimates that Guyana will pump 1.7 million barrels per day by 2035, higher than other major offshore basins, including the Gulf of Mexico, making the country the world’s fourth-largest producer of offshore oil.
Rig zone: What news/trends will you be waiting for next week?
Krishnan: A battle between $70 and $74 in WTI.
To contact the author, please send an email andreas.exarcheas@rigzone.com
