- Analysts are becoming increasingly concerned about where oil prices might head following the midterms.
- The looming EU embargo on Russian oil could send prices significantly higher.
- The White House’s newly released policy aiming to “strengthen energy security, encourage production, and bring down costs,” fails to address one key issue; underinvestment.
“In the event that a vessel under the flag of a third country has transported Russian crude oil or petroleum products purchased at a price above the price cap, it should be prohibited to provide technical assistance, brokering services, financing or financial assistance, including insurance, related to any transport in the future by that vessel of crude oil or petroleum products” That will certainly spark a profound chilling effect across the entire industry. But what about Biden’s SPR drain – is it really that useless, and won’t it help at least a little? Well, according to Sen, limits on how low stocks can be drawn mean sales won’t be as large as some expect (analysts are expecting a release of as much as 100m bbl; with 26m bbl to be released between December and February). But the clearest explanation why Biden’s last-ditch SPR release won’t do jack, comes from Goldman’s commodity strategists led by Jeff Currie who published a note late on Thursday which they write the following: Following OPEC+’s surprise 2mb/d cut on October 5, the Biden administration was quick to imply a policy response, concerned about rising gasoline prices fact sheet into November 8 midterms. On October 18, the White House released an energy policy. The speech highlights various ahead of President Biden’s speech concerns and actions taken by the administration to “strengthen energy security, encourage production, and bring down costs.” The 15 mb SPR drawdown (the final tranche of the 180 mb Spring announcement) drew headlines, but of more interest was the plans to refill the SPR at fixed prices for future delivery “at or below about $67-72/bbl”, offering some support to crude prices below the ‘shale band’. This truncation of the price distribution should encourage investment in growing production – if only marginally. We find marketing and refining margins in the US to be elevated, 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 find incremental SPR sales as the most likely action (16mb is available from FY2023 Congressionally mandated sales), although this remains price dependent: requiring higher prices than present, and likely closer to $125/bbl following the midterms. Such a release is likely to have only a modest influence (<$5/bbl) on oil prices however. All options have trade-offs. Product export bans, in particular, could send wholesale global distillate/gasoline prices up $150/$50/bbl respectively (to $300/150/bbl) and still risk shortages and higher prices domestically – especially in coastal regions. All responses leave the ultimate cause of energy underinvestment unaddressed. We continue to expect headlines into next month’s midterm elections as the US administration attempts to exert downward pressure on retail prices. However, we think action at current price levels remains unlikely. This policy reflexivity is reflected in our current forecasts ($115/bbl Brent in 1Q23 ), as the deficits we expect, following OPEC+’s decision to cut, look unsustainably bullish given scarce inventories and our balance outlook. The risk of inventory depletion and price spikes requiring demand destruction as a rebalancing of last resort could yet move prices $30+/bbl higher. There is more in the full Goldman reports, including an analysis of why a product export ban will exacerbate the global shortage of refining capacity, why a gasoline federal tax holiday would be modest in impact, why easing sanctions on Venezuela is not a quick fix, and why the “NOPEC” bill has only very limited upside.