When the US energy secretary raised the prospect yesterday of releasing crude from the US Strategic Petroleum Reserve (SPR), as well as potentially banning US crude oil exports, oil promptly tumbled and has continued to fall overnight.
Such a comment follows the recent rise in US retail gasoline prices to their highest level since late 2014, with the liberal media increasingly reporting the risks such prices could potentially pose for the democrats ahead of the midterm elections next year.
And while the market clearly sold first and didn't even bother to ask questions, an analysis published overnight from Goldman suggests that fears about an immediate rout are displaced as the most the US would likely sell is about 60mm/b, a number which represents only a small risk to the bank's recently hiked $90/bbl year end price target. Worse, looking ahead, Goldman expects that this latest bizarre action from the Biden admin "could perversely prove inflationary instead. A larger speculative price decline than our fundamentally derived $2/bbl move would for example further slow the recovery in shale activity."
As for the proposed export ban that would, naturally, be a disaster: "a halt to US energy exports would further widen the country’s trade deficit, leading to a potentially weaker USD and - as a result - higher domestic (imported) inflation."
Commenting on a potential sale, Goldman's Damien Couravlin notes, "such relief would, however, only be transient given the structural deﬁcits that the global oil market will face from 2023 onward." Making matters worse, any larger price impact that further slows the US shale oil activity rebound would in turn lead to much higher US natural gas prices next year, in other words if Dems want to salvage the midterms they would be sacrificing the presidential election.
Finally, Goldman dismisses an export ban as a realistic outcome as it would "signiﬁcantly disrupt the US oil market, with a likely bullish impact on US retail fuel prices that price off Brent."
We excerpt from his full note below
- There are two precedents for such sales - the 2011 emergency sale during the Arab Spring as well as the 2000 exchange from the Clinton administration ahead of the presidential election. Other sales have been either emergency exchanges around hurricanes, test sales, or planned budget sales. Beyond the incentive of sequentially lowering gasoline prices, the timing of such an SPR release is surprising. Although oil prices have increased sharply this year, they are not historically elevated, with past sales announced at an average $93/bbl Brent prices since 2000, adjusting for inflation. Further, even at $90/bbl Brent, spending on energy would only represent a4.5% share of US consumer expenditures, with past SPR sales achieved at a much higher threshold of 5.5-6%.
- The price relief provided from such a sale would further likely only be modest and transient. From a volumetric perspective, the US SPR contains 618 mb, with a current minimum SPR inventory requirement from Congress of 340 million barrels and with current projected inventories by FY 2028 of 402 mb (reflecting approved sales for fiscal purposes). This leaves 60 mb available for sales which, if released, would represent c.$3/bbl downside risk to our $90/bbl Brent year-end price forecast.While the minimum requirement could be changed, the recent rapid rise in coal prices is a timely reminder of the value in holding strategic inventories, especially as under-investment in supply risks leaving the oil market under supplied even as its consumption falls in the 2030s. With the sale not offsetting an unexpected disruption (hurricane, war, sanctions), it would further not prevent the global oil market from heading into a structural deficit from 2023 onward, and compares to a market currently drawing at least that much each month.
- While such an SPR release could be viewed as needed to supplement the slow recovery in shale activity and ramp-up in OPEC production, we believe such actions could perversely prove inflationary instead. A larger speculative price decline than our fundamentally derived $2/bbl move would for example further slow the recovery in shale activity. This would leave for a greater dependency on OPEC production and a further reduction in US shale oil service capacity, increasing the incentive price for the rebound in shale activity eventually required by the global oil market. In addition,such actions would lead to much higher US natural gas prices. Specifically, any delays in ramping up shale oil activity would reduce the recovery in associated natural gas production next year, pushing US natural gas prices sharply higher given the limitations in ramping up shale gas production in other basins due to the lack of spare pipeline capacity (Appalachia, Haynesville).
- An SPR release would bring forward the potential for restricting oil and LNG exports, keeping these hydrocarbons in the US. Such an action would bring the additional benefits of sharply reducing the carbon intensity of US exports, strengthening the US administration’s negotiation power ahead of discussions on the carbon border tax adjustment proposed by the EU (a key buyer of US oil and gas). Such a blunt tool would however likely create large price distortions, with US export restrictions depressing WTI crude oil prices relative to Brent in order to balance the domestic market. This would also have knock-on effects on the product markets. Ironically, it would be particularly bullish gasoline and refined products more generally due to the fact the US will still be a net importer of gasoline, with the product needing to price off of a much tighter Brent market to incentivize a continuation of such flows.
- In addition, constrained global crude flows will lead to sub-optimal product output as heavier crudes suited for more complex US refiners would have to clear through more simple facilities abroad, producing more diesel, fuel oil, and other less desirable residues. Lastly, lower output of shale over time would decrease global gasoline yields even further. Unlike an SPR release, such a decision would further likely take time to implement, requiring the US administration to first reverse its prior rulings that US gas and oil exports were in the US public interest. As well as this, a halt to US energy exports would further widen the country’s trade deficit, leading to a potentially weaker USD and - as a result - higher domestic (imported) inflation.
As a bonus, RBC Capital Markets energy analyst Helima Croft also chimed in on the possible SPR sales, writing in a note that comments from U.S. Energy Secretary Jennifer Granholm about potential release of crude from the SPR "were clearly aimed at trying to incentivize Saudi Arabia and its OPEC+ partners to put more barrels on the market."
While the remarks reflect growing concern in the White House about a “perilous run-up in prices that could derail the global recovery”, Croft notes that refiners are already running at the highest seasonal rate in the last five years, so additional barrels would not translate into materially greater amounts of refined products, doing little to curb fuel prices. Nonetheless, she notes that “we see a path for the domestic political team to drive the policy process and potentially push for energy export bans”