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A couple of months ago Mr. Biden sojourned to Saudi Arabia to beg the Crown Prince for help containing surging U.S. gasoline prices. Now it looks like the meeting was worse than unproductive. Reports say OPEC and its allies including Russia will consider slashing their production targets by a million barrels a day when they meet this week.
Analysts estimate this would lift crude prices to about $100 a barrel from the $80 to $90 range of the last month.
The Administration has released 200 million barrels or so from the Strategic Petroleum Reserve over the past year and about one million barrels a day in recent months. These drawdowns were scheduled to end this month, but the Administration recently extended the releases into November, no doubt worried that a taper would increase gasoline prices before the midterm election.
Producers normally respond to rising prices by raising output. That was true in the past in the U.S., especially from 2016 to 2019 when production increased by about three million barrels a day. But U.S. producers haven’t responded to higher prices during the Biden Presidency as much as those in other countries, including Russia, Canada and Norway.
Pioneer Natural Resources CEO Scott Sheffield last month estimated that U.S. oil production will likely grow by a mere half a million barrels a day this year and perhaps even less in 2023. So even though oil prices have been about 50% higher under Joe Biden than under Donald Trump, production growth is about 50% lower.
Democrats blame oil drillers for prioritizing profits over production, but companies must consider the long-term return on investment. The Biden policies have created substantial regulatory uncertainty, raised production costs, and directed capital to green energy.
Electioneering Is Not Strategic
Biden has it in for oil companies begging both Saudi Arabia and Venezuela to increase production.
Noe the SPR supply is down to about 21 days. If there was a genuine emergency that's all we have.
There is nothing at all strategic about Biden's draw down unless you consider midterm election politics as strategic.
Will a weakening economy offset the expected cuts?
Meanwhile please note ISM Drops to Lowest Level Since May 2020, New Orders Plunge Into Contraction
Good luck if there is even a mild shock with production cuts.The September ISM report is much weaker than expected, with employment, new orders, and new export orders all in contraction.
By the way, whatever happened to that Ridiculous Buyers' Cartel idea?
OPEC Times Biden Perfectly With October Production Cut Surprise
Please consider OPEC’s October Oil Surprise A couple of months ago Mr. Biden sojourned to Saudi Arabia to beg the Crown Prince for help containing surging U.S.mishtalk.com
We were a couple of years ago.We need to return to self-sufficiency.
I don't say gas prices coming down, I say they're still $1.30-$1.40 more (in my area) than when Trump was president.87 octane is now down to $3.30 from $4.90. You gotta believe the public thinks Slo Jo did them a favor just in time for the erections. SHTF when the depleted reserves have to be replaced.
And while the recent collapse in investor participation, which has driven liquidity and prices lower, is also a likely strong catalyst for such a cut – as it would increase the carry in oil and start to claw back investors who have instead turned to USD cash allocation following the aggressive Fed hikes – what Goldman is effectively saying is that by OPEC is taking the fight back to the Fed, which by hiking and pushing the dollar to record highs sent the price of oil to new 2022 lows. Well, just as the Fed can limit the supply of dollar bills, whether physical or electronic, so OPEC can throttle and cut the all too physical supply of oil in retaliation.Reports suggest that OPEC+ is considering a production cut at its meeting on Wednesday, October 5, potentially larger than 1 mb/d. While such a cut would occur amid one of the tightest markets in recorded history, and ahead of a potential decline in Russian exports later this year, such a decision could be justified by the recent large decline in prices, down 40% since their June peak, with mounting global growth concerns.
Historically, OPEC has often cut production in the face of weakening demand, yet it has never implemented a cut in such a tight market, with inventories at historically low levels, record strong seasonal crude timespreads and with demand remaining resilient despite the macro headwinds.
While inventory dynamics have loosened in recent months (Exhibit 1), a portion of these builds (100mb+ by our estimates) are required due to the redirection of trade flows under embargo constraints. Adjusted for oil on water, we estimate that the global oil market has instead remained in a seasonally adjusted (2017-19 av.) deficit, which is expected to seasonally and cyclically tighten in the coming months. Very large and unsustainable draws in China have also exacerbated the ex-China surplus. Looking forward, we expect Russian production to decline into year-end with in turn demand expected to be supported by natural gas to oil switching in Europe and Asia.
Beyond the decline in prices, we believe this cut can help remedy the large exodus of oil investors that has left prices under-performing both fundamentals and other cyclical asset classes, as we discussed in our latest oil update. Such an argument can be traced back to our past work our Commodities as an Asset Class. Equity and debt holders of energy companies get compensated for providing capital from which companies profitably produce via dividends and share price appreciation. A commodity investor has no such function, investing in a futures market which is a zero-sum game, simply acting as the counterpart to an offsetting future position. Key however is the liquidity that is provided by this investor position, typically helping offset that of a producer, willing to sell his future production at a discount given the corporate benefits of reducing earnings volatility. While such hedging flows have slowed materially this year, the investor exodus has been even larger owing to the surge in price volatility, exacerbating backwardation – and hence the compensation for long investors – in energy futures.
An OPEC cut, by reinforcing this level of backwardation, would further increase the carry offered by a long passive front-month rolling position in Brent futures, which already offers an annualized carry of 24%. This would make such an allocation increasingly compelling relative to other forms of carry, with, unlike most FX crosses today, supportive fundamentals rooted in exceptionally low inventories. It would further increase the opportunity cost of being short oil futures: given the positive carry, the 12-mo breakeven price on front-month rolling short positioning is already $67/bbl. Similarly, high volatility and the outsized impact of producer hedging on deferred prices have combined to increase the cost of puts, with a Dec-23 ATM put position requiring a fall in that contract’s value to $61/bbl to become profitable at expiration.
Ultimately, the ability for OPEC to conduct such a large cut is rooted in the lack of any supply elasticity, with shale activity showing signs of slowing, no spare capacity outside of GCC producers and with Russia’s production about to decline (leading it to support this time around a large cut by other producers). This is ultimately a return to the Old Oil Order, where core-OPEC acts under the rational behavior of a dominant producer with pricing power. In that sense, while exceptional, this cut is also logical as it maximizes the group’s revenues today with minimal sacrifice of future profits.
While we take no explicit assumption on the meeting outcome for now, given our already bullish forecasts, we highlight three headline scenarios with cuts of 0.5, 1, and 1.5 mb/d respectively – and assess what they imply for prices and timespreads. Due to widespread capacity limits within OPEC+, a headline (“paper”) cut is likely to overstate significantly the effective (“physical”) curtailment of production. We show in Exhibit 4, across these three scenarios, that the effective cut is likely to be only c.50% of the headline quota figures compared to our Nov-22 supply expectations, and closer to c.2/3 of the headline when translated into balances through Dec-23 as we had assumed gradually higher production next year.
As we discussed in our latest oil note, we believe the market is oscillating between its historical pricing framework (based on inventories and convenience yields) and a scarcity pricing regime (predicated on demand destruction as the only balancing mechanism). In the case of a 1 mb/d headline cut, the former regime would lead us to expect a c.$13/bbl positive impact on Brent prices over 12 months, albeit mostly front-loaded, while the latter regime suggests a distinct possibility of a c.$20/bbl spike higher when inventories deplete again and demand destruction remains the balancing mechanism of last resort.
In Exhibit 5, we consider the effect of these potential cuts assuming prices remain near current levels (consistent with our ‘Pre-price’ balance published here). In this scenario, these OPEC+ cuts would tighten inventories to historically unparalleled lows; an unsustainable outcome in our view but one that would initially offer historically elevated roll returns of 25-40% for rolling the prompt Brent contract (Exhibit 6 and Exhibit 7) even at $85/bbl price levels. As a result, we reiterate both our bullish oil view as well as our preference into year-end front long crude timespread positions.
Wtf did he think they were gonna do? I knew they were gonna cut and the bidet has access to far more info than little ol' me does.
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2022.11.05 The Oil Price Cap Idiocy
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Add to that, Canada has 167 billion barrels of our oil.Although I agree with him about Biden begging the Saudis, he didn't mention that the WEF/UN (Biden's boss) is actively anti-energy abundance. Also, I thought he gave the impression we're going to run out of oil soon. The US alone has 264 billion barrels of recoverable oil reserves. If we keep burning around 7 billion drums a year, we've still got 37 years *if* they don't make large new discoveries.
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Seriously? They let 180 million barrels go and are soliciting to purchase 3 million back in February. So the SPR would still have a 177 million barrel deficit, and we’re supposed to laud Biden as an oil swapping genius? Is that what I’m supposed to take from your last 2 posts, or am I reading the tea leaves wrong?
reading the tea leaves
Actually, no tea. While on vacay out of the current Montana freeze for a beach in Florida it’s mostly Corona or Margarita.What kind are you using?
There are many types of tea. However, loose tea – green, black, white, or oolong – is the best tea for tea leaf reading.
Read more: https://www.teaanswers.com/tea-leaf-reading/#ixzz7o1AwanPs
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