Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
You can sure tell the difference between politicians and businesspeople. Politicians have a tendency, when it comes to making business decisions, to do the wrong thing because they are risking taxpayer money and not their own. This is abundantly clear when it comes to the Biden administration’s big announcement that they are seeking bids this fall to buy back 60 million barrels of crude oil that they sold at much lower prices. They must think that the way to economic stability is to buy high and sell low. Just like so many of the Biden administration’s economic policies that are the exact opposite of what you are supposed to do.
First, no announcement was needed because it was widely known that the administration was going to have to at some point buy back the oil that they shamelessly released from the Strategic Oil Reserve. The Biden administration tapped the oil reserve starting in November not because of a major emergency or because of the war in Ukraine but just because they thought gasoline prices were too high.
By making such a public announcement to buy back the oil and the exact amount they want to buy, it will raise the cost of the oil and they’ll end up paying more for it. Why buy it in a stealth manner.
The White House first tapped the reserve in November, releasing 50 million barrels of oil because they said that the, “American consumers are feeling the impact of elevated gas prices at the pump and in their home, heating bills, and American businesses are, too, because oil supply has not kept up with demand as the global economy emerges from the pandemic. That’s why Biden is using every tool available to him to work to lower prices and address the lack of supply. Yet the Strategic Petroleum Reserve is not and should not be used as a tool to try to control prices. The Strategic Petroleum Reserve (SPR)is not big enough to even attempt such a venture and it was doomed to failure from the start. In the November of Biden’s ill-fated announcement, the price of oil closed at a price of oil that was about $68 a barrel and today it is hovering close to over $110 a barrel. So now he wants to start buying oil back?
Of course, the November oil release was never about controlling price, it was about politics. Biden’s poll numbers were falling and there was anger because most Americans know that his anti-fossil fuel agenda helped increase prices. It was also a feeble attempt to send OPEC plus Russia a message that he would not stand idly by after OPEC and their favorite co-conspirator Russia failed to raise oil production when Biden asked them to.
Biden’s bungling of its handling of relations with Saudi Arabia may be the blame for that. His proclamation that he was going to make Saidi Arabia a ‘pariah state” and his refusal to acknowledge the country’s de facto leader Crown Prince bin Salman because of his alleged killing of Saudi-born American citizens and journalist Jamal Ahmad Khashoggi. He also failed to back Saudi Arabia after missile strikes by Iran-backed Houthi militants in Yemen against the U.A.E. and Saudi Arabia which hurt U.S. Saudi relations. Things became so strained that the Wall Street Journal reported that, “The White House unsuccessfully tried to arrange calls between President Biden and the de facto leaders of Saudi Arabia and the United Arab Emirates as the U.S. was working to build international support for Ukraine and contain a surge in oil prices, said the Middle East and U.S. officials. I think it fair to say that if the Biden administration had better relations with Saudi Arabia, they would have been more inclined to heed his call for more oil as they did with his predecessor President Donald Trump.
President Trump was a businessman who understood to buy low and sell high. President Trump proposed an oil deal that would have netted taxpayers billions of dollars but was thwarted by democrats who blocked his plans for buying oil for the reserves at historically low prices. President Trump, as reported by Bloomberg News, proposed to buy $3 billion worth of oil, at the time, buying $3 billion worth of West Texas Intermediate crude would have brought in 122.5 million barrels for the Strategic Petroleum Reserve at $24.49 each sold it today at the current price near 110.49 it would generate a profit for US taxpayers over 10.53 billion dollars.
Yet democrats blocked the deal. Senate democrat Leader Chuck Schumer bragged that the deal blocked a “bailout for big oil” and other democrats cheered the blocking of Trump’s proposed sale as a win for the environment. Yet CNN now reports that the Biden administration hopes the buy back plan will encourage domestic oil production by guaranteeing a source of future demand. The same administration that put on drilling moratoriums, blocked drilling on federal land and discouraged investment in fossil fuels is now hoping that spending money refilling the reserve they drained will encourage domestic production.
Yet when Biden gained control of the SPR he decided that he could use the reserve as his own little political piggy bank. Yet his actions failed to cool oil prices. Biden used the oil reserve for the wrong reason and he now has to buy back oil at sharply higher prices that instead of making taxpayers money will cost them billions.
Now they may be thinking that based on the backwardation in the market they might get a chance to buy oil cheaper, but the reality is that at the time they get around to buying the oil, it might not be there. Besides if you signal you’re buying 60 million barrels in a thin market, you will drive up prices even further. This is the same administration that thinks that the way to lower inflation is to add more government spending and raise taxes and put on more regulations. God help us.
The timing of the passing of the No Opec Deal won’t exactly help encourage OPEC to raise output. Reuters reported that, “A U.S. Senate committee passed a bill on Thursday that could expose the Organization of the Petroleum Exporting Countries and partners to lawsuits for collusion in boosting crude oil prices. The No Oil Producing or Exporting Cartels (NOPEC) bill sponsored by senators, including Republican Chuck Grassley and Democrat Amy Klobuchar, passed 17-4 in the Senate Judiciary Committee. White House spokesperson Jen Psaki said the administration has concerns about the “potential implications and unintended consequences” of the legislation, particularly amid the Ukraine crisis. She said the White House is still studying the bill according to Reuters. The Press secretary is right about that.
In the near term, the fundamentals for oil are bullish and it is only fears of an economic slowdown in the future that is holding us back. Tougher sanction on Russia looks to be more bullish as the EU is moving closer to cut off Russian oil and the U.S. moves to further clamp down on Russia. S&P Global Platts reports that, “US secondary sanctions, like those reimposed on Iran in 2018, pressure third-party importing countries to reduce their purchases from the target country over time by a certain amount of risk of being cut off from the US financial system. “The primary goal will be to prevent Russia from simply rerouting oil elsewhere,” said Brian O’Toole, a nonresident senior fellow at the Atlantic Council and a former senior sanction official at the US Treasury Department. O’Toole expects the US to “take action that mirrors whatever the EU does and put the might of US sanctions behind the EU actions.”
One has to wonder if supplies are already so tight, what is going to happen when China reopens its economy? That is also a bullish scenario and expectations in Indian oil demand are going to increase. This will also keep supplies very tight.
On the product side of the market, diesel fuel seems to be pulling back from its meteoric rise. It appears that refiners are responding to sharply higher diesel oil prices which is probably going to come at the expense of gasoline. Go fill your gas tank. The diesel oil crack spread had been leading. We expect the gasoline crack spread should do better. f the stock market stabilizes, both spreads should do well.
Natural gas prices continue to soar as it looks like natural gas could hit $10. We continue to work to be a buyer of natural gas on pullbacks but beware of high volatility.
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