UPSIDE RISK: US and allies have dramatic plans to sell oil from their emergency ‘strategic petroleum reserves’ (SPR) to contain $100+ oil prices. The US is targeting sales of 1.0m barrels daily, equal to 1% global supply, for six months. Allies are planning a 60m bbl. release. This is easing prices today, but is risky and could easily backfire. It is insufficient to offset c3.0m barrel lower Russian production, will leave US reserves perilously near ‘minimum’ levels (see chart), and its plan to buy back sold barrels will boost medium term prices. This supports our view of ‘high-for-longer’ oil prices, with equities (XLE and @OilWorldWide) especially attractive.
DYNAMICS: These planned sales could take the US perilously close to its minimum strategic oil reserve level (see chart), at a time when Russia production is falling, OPEC has less supply flexibility than perceived (and could pump less to offset SPR sales), and a hoped for ramp up in US shale production and drilling activity is lagging. International Energy Agency (IEA) rules require States to maintain reserves equal to 90 days of net imports. This could leave the US with as little as a 70m bbl. oil reserve buffer after its announced sales down to around 385m bbls.
UNPRECEDENTED: These planned US oil sales are unprecedented, at three times the size of any done before. At best they may restrain price rises. At worst, focus attention on how tight the oil market is, and the lack of new supply. This will drive continued global inflation and interest rate concerns, demand for inflation ‘hedge’ assets from commodities to Value cyclical equities, and further political moves to cushion consumers like ‘gas’ tax holidays and direct payments.
All data, figures & charts are valid as of 07/04/2022