Israel’s ability to detonate thousands of pagers targeting Hezbollah in Lebanon is like something out of a spy novel but also alerts us to the next level of risk potential to the global oil supply. The possibility of retaliation by Hezbollah and perhaps Iran is likely but at the same time Israeli tactics and ability to take out Hamas leaders and thwart attacks by Iran means that Iran and its proxies might have second thoughts before carrying out retaliation. Yet for oil, geopolitical risk will go on the back burner and go micro as it is all about the Fed.
Oil prices rallied yesterday not only on the pager attack but also because the market was starting to price in a higher likelihood of a 50 basis point cut from the Federal Reserve today. Overnight the market is pairing back that bet and that caused oil to dip in overnight trading.
We also get the Energy Information Administration (EIA) weekly petroleum status report. The American Petroleum Institute’s (API) version showed that crude supplies increased by 1.96 million barrels. But at the same time, we saw another drop in Cushing, Oklahoma of 1.4 million barrels.
Most people believe that tank bottoms in Cushing, OK is somewhere around 20 million barrels and we’re getting dangerously close to tank bottoms. If the supplies continued to tighten in Cushing, it could it lead to a potential price spike for WTI futures.
The API also reported bigger-than-expected increases in gasoline supplies putting them at 2.34 million barrels higher than the week before. Distillate inventories also rose by 2.3 million barrels.
From day one, the Phil Flynn Daily Energy Report has been critical of President Biden’s misuse of the Strategic Petroleum Reserve (SPR) using it as a tool to try to attempt to manipulate prices for political purposes and not use the SPR for its stated purpose.
We have already said that the strategic petroleum reserve was built to be tapped in case of an emergency shortage that could damage the economy and not to try to manipulate oil prices, a task that is impossible to do regardless. Now it looks like Biden bankrupted the SPR reducing the size of the SPR by a record amount with no real plan to replace that oil nor the money to accomplish just that.
Not only did Biden reduce the US SPR inventories by more than 180 million barrels apparently, they also don’t have the money to replace those barrels. This comes as the Biden administration announces a bid to buy back 6,000,000 barrels of oil but that may be only a drop in the barrel bucket.
Bloomberg News is warning that may be the end and it may be a very long time before we get to the strategic petroleum reserve filled back to the level it should be. They write, “Restocking” crude near $70 a barrel would be a nice deal for the US, but it lacks the funds to do so.
Bloomberg writes, “The administration of President Joe Biden sold off a record amount of crude from the Strategic Petroleum Reserve over a six-month stretch in 2022 when the average price was $95 per barrel. Replacing supplies at current prices would be a nice deal. The problem is the government’s crude-procurement fund doesn’t have enough cash to pull it off.”
The Energy Department account to buy oil for stockpiling is down to about $841 million, according to an estimate by the consulting firm ClearView Energy Partners. It would stretch to about 12 million barrels at today’s prices. That would be a mere fraction of the 320-million-barrel shortfall between the current amount stockpiled and the SPR’s maximum capacity of more than 700 million barrels.
Oil prices may fluctuate on what the Fed does today. The long-term picture for oil still looks extremely bullish. The recent sell off in oil is probably overstated and out of whack with the fundamentals and we should see a supply squeeze keep prices from falling too much further. Cushing is near tank bottoms and at some point supply and demand will matter.
Natural gas continues to trade up and down in the tight range. Reports that some natural gas production in the Gulf of Mexico is coming back online from Hurricane Francine put pressure on prices. From operator reports, BSEE estimates that approximately 5.62% of the current oil production and 9.68% of the current natural gas production in the Gulf of Mexico has been shut in. So much improvement.
Just when you think the worst of the hurricane season is behind us for oil and gas production, Fox Weather reminds us that hurricane season is just getting heated up. Fox Weather says that a New tropical disturbance threat looms in Caribbean, Gulf of Mexico as Central American Gyre stirs. As tropical activity in the Atlantic Ocean quiets down again, attention is shifting back to the Caribbean and Gulf of Mexico, where there are increasing signs of atmospheric conditions favorable for the development of possibly the next named storm sometime next week.