The oil market sits on tenterhooks here, caught in resounding influences that will only end up with those that take risk caught in an eddy of mixed signals. The little observed but normally signal providing decision by the Reserve Bank of New Zealand to hold rates is one that more than likely will see the ECB conform to tomorrow. In its advisory the RBNZ said that rate would have to remain restrictive because the outlook for inflation remains elevated, something that will be made all the more important today as the world awaits the US CPI data. The plight of inflation will continue to haunt the prospects of rate cuts and anything that comes in hotter than the 3.4% expectation for the March reading will bring pressure to bear on all markets.

The API data signals another build in crude oil stocks but oil statisticians’ eyes will be taken away from the DoE data later, if it adheres to the API signalled build of 3mb, and dwell on the EIA Monthly Report and how it compares with its OPEC counterpart report tomorrow. As was the case last month with the IEA, the EIA yesterday pulled a ‘mea culpa’ on how it has underestimated oil demand from around the world and adjusted higher its 2022 and 2023 figures. More importantly, and indeed relevant, is the agency raised its expectation for the Brent price in 2024 to $88.55 from $87.00 and world consumption by 480kbpd to 102.91mbpd for this calendar year. Interestingly, and a counter to what initially looks a more bullish stance, is that the EIA sees US production increasing by 280kbpd to 13.21mpbd for this year and by 510kbpd to 13.72mbpd in 2025.

Additional to the above listed considerations are technical ruminations on not only how prices have pulled back from overbought status in some cases, but the monthly gyrations surround the rolling of positions from fund monies. More pressure is likely to be seen, given the size of open interest and how net length makes up a goodly portion of it. This might just be felt more keenly in the unlikely event that Israel and Hamas representatives can find any sort of accord in the current ceasefire negotiations.

 

Trading the SPR is harder than it looks

The Biden administration, when gaining power in January 2021, was bequeathed with a mighty gift of Strategic Petroleum Reserve that measured in excess of 630 million barrels. Such magnitude of stock would soon be dipped into as the Russian invasion of Ukraine unfolded and oil prices as we all know took to the skies. After running around oil companies urging them to pump and process more oil and taking to the airwaves bemoaning price gouging, he accused oil giants of war profiteering and raised the possibility of imposing a windfall tax if companies did not boost domestic production. Having achieved little success, and a windfall tax unlikely to pass on Capitol Hill, the US President ended up with little option other than to release SPR in an attempt to tame soaring oil and particularly election busting gasoline prices. His administration released over 180 million barrels and by the summer of 2023, the massive holdings of the US dropped to 347 million barrels and while the SPR sales were not the only reason, it certainly helped in bringing M1 WTI down from 130.50 in March 2022 to the low of 63.64 in May 2023.

The record sales of SPR meant that the so-called emergency storage level stood at the lowest for some 40 years and even though the release certainly aided the fall in oil prices, having such a lowly level of rainy-day availability obviously attracted critical attention from political opponents. Countering with a pledge to replenish stock levels when US oil prices fell to a range of $67 to $72/barrel, the Biden administration again harried drillers with a reasoned argument that with such a sizeable, reliable bid in the market from the US government, then there was little reason for output not to increase. The trouble with this cunning plan is that it relied on US producers to play ball, however, after years of debt-ridden existence and an impatient set of shareholders, profit came before politics. Such a revealing strategy also showed the market that WTI would from now on hold a +/- $70 bid for about 180,000 lots equivalent which not even the most negative, doomsaying bear could or would sell into. Later, the target purchase price was adjusted higher to $79, however, the US economy then proceeded to carry on picking up followed by Saudi taking a tightening tool to the pipes of OPEC oil supply, and what looked like an easy opportunity to cover its short position saw the US government fall foul, as many traders before, of nursing its ‘profits’ too much and missed the market.

Currently the SPR stands at 363 million barrels, only 17 million up from the low levels of last year. Most analysts and oil inventory watchers appear to agree that this derisory increase has not been about any sort of intended buying action on the part of the government to fill tanks, rather than that of cancelled SPR sales. The problems in encouraging more production, as outlined earlier, from US drillers is valid in current times. US oil producers cannot increase output due to the supressed nature of the Natural Gas market. Dragging more oil from the depths means dragging more gas and unlike oil, any extra gas will have to be discounted if it is to find a market home. With M1 Henry Hub natural gas futures trading at $1.86 MMBtu, it would appear that the market is way below the differential needed for extra drilling to be financially viable. According to Deep Well Services and quoted on Reuters, gas prices need to be at $2.50 MMBtu for an increase in drilling activity.

Without a worthy domestic supply to get its teeth into, the US DoE has had little choice other than to cancel purchases as the price of crude soars away from appealing levels. Claiming that it was ‘keeping the taxpayer’s interest at the forefront’, it is more likely that the US wanted to be excluded as a price rise agitator by removing itself from the theatre of bullish influences. Trading the SPR has not been the simple exercise the US DoE/Biden administration might have envisaged. Dragging its feet and not heeding the lesson that countless numbers of our brothers and sisters have learned over the years not to be cute or greedy has cost dear. The US may not be a buyer at the moment, but we all know there’s a lurking short coverer somewhere. That is of course, and wait for it, President Joe Biden does not go all-in and release another 180 million!

Overnight Pricing

© 2024 PVM Oil Associates Ltd