Energy Prospectus

MY TAKE: I have no problem with Joe's announcement today to release more oil from the SPR. Refiners MUST HAVE more heavy oil to refine into diesel. This county runs on diesel.

Biden's Massive SPR Release "Does Not Resolve" Upside Risks, Goldman Warns As It Hikes 2023 Oil Price Target To $115
BY TYLER DURDEN
THURSDAY, MAR 31, 2022 - 12:30 PM

Update (16:00ET): The Biden administration confirmed a record large Strategic Petroleum Reserve release of 180 mb over the next six months to fight the "Putin price hike at the pump", with the potential for other countries to release 30 to 50 mb. As noted earlier, while such a release will help trim prices in the short-term, increasing supply and commensurately reducing the amount of necessary price-induced demand destruction - the sole oil rebalancing mechanism currently available in a world devoid of inventory buffers and supply elasticity - it will lead to higher prices over the longer-term as the government's panicked, political intervention in the energy market which is obviously meant to avoid a Democrat wipeout in the midterms will discourage any rational investing in supply by US majors. Furthermore, a release of inventories is, only a temporary source of supply and in fact, as Goldman notes, lower prices in 2022 support oil demand while slowing the acceleration in shale production, leaving for now a deficit in 2023 with an eventual need to refill the SPR.

As a result, in a note published late on Thursday, Goldman updates its oil supply, demand and price forecasts accordingly, in which the bank is increasing its already expected SPR release to match today’s announcement of 1.2 mb/d over six months, while delaying an expected ramp-up in Iran exports to 3Q22 given delays coming to an agreement and the lag in the required certification for exports to resume. Separately, Goldman's expectations of a 1 mb/d hit to Chinese demand due to lockdowns in 2Q remains unchanged, with OPEC+ expected to stick to its scheduled quota increases through 3Q22 consistent with today’s decision. Finally, the bank is also increasing the probability of a Moderate Russian export disruption scenario (to 50%), implying a slightly larger loss of supply in our weighted mean outcome.

This leads Goldman to cut its 2H22 Brent price forecast from $135 to $125/bbl while also raising the 2023 Brent forecast from $110 to $115/bbl. In particular, the bank says it doesn't see "today’s decision as resolving oil’s structural deficit, now years in the making." This is consistent with the resilience in long-dated prices today, with Dec-23 Brent remaining the bank's preferred long-term bullish oil trade (with EU Gasoil cracks the preferred short-term oil trade).

Read more: https://www.zerohedge.com/political/oil ... ease-again

Many are of the view that the SPR release, alone, will disincentivize drilling (and investment), reduce demand destruction (increasing consumption), reduce the amount of associated gas produced at a time when it is desperately needed, result in lower inventories and higher oil prices in 2023, have only marginal effect on price at the pump, and do nothing to relieve our dependence on foreign oil (while depleting our strategic reserve), and thus contribute to further weakening of U.S. energy security. The story you posted refers to most of these. To the extent those are true, are you saying they are collectively outweighed by temporary, partial relief of the (admittedly problematic) diesel shortage?

Wouldn't a better policy decision be to issue permits for pipelines and drilling, discontinue increasing regulation on production activities, discontinue pressuring banks not to lend to fossil fuel producers, leave business expensing in the energy industry alone, and just generally get out of the way of the industry so that it can respond to high prices as it has in the past, by ramping production?

I agree with your "better policy" as the long-term solution to a BIG PROBLEM. The SPR is a very important "Savings Account" and depleting it does lower our national security.

The shortage of diesel is a MAJOR PROBLEM TODAY. Demand for diesel goes way up in Q2 because farm equipment runs on diesel, and we have to plant a lot of crops in Q2 to feed this country. Plus, the supply chain problem cannot be fixed without running our fleet of big trucks that burn a lot of diesel. Most drilling rigs also burn a lot of diesel. Today we are very close to needing to ration diesel.

Diesel cannot be refined from ultra-light shale oil. SPR oil is heavy oil and our refineries need more of it now. BTW our refineries are already running at 92% of capacity and we still can't build up the distillate inventories.

Increasing U.S. oil production will take time and cost a lot of money. Even without the supply chain problems we have today, the logistics of putting 100s more drilling rigs to work takes time and lots of people. Our governments red tape is definitely part of the problem. Team Biden is clueless and IMO doing the SPR release for political reasons, but at least it might help today's diesel shortage.

Fair answer, thank you.

The future will show just how damaging to the country current policies regarding the fossil fuel industry will be. Food shortages, obviously, would be catastrophic politically, so trying to remedy the diesel (and fertilizer, except they're not) problems now are understandable. Success in that regard, however helpful in the short run, in the absence of fundamental policy shifts more broadly, will likely be short-lived (in line with most politicians' timeframe) and be overshadowed in 2023 if pump prices are back at $5-6. And, where will the heavy oil needed in 2023 come from? Venezuela?

Somewhere it was written that the SPR release can be viewed as an act of desperation.

Biden's team is cornered, with no "good" options, and taking what they see as the path that is least objectionable to the renewable theocrats while meeting a short term need (attempt at reducing pump prices and avoiding food shortages before November, which are but symptoms of a much larger fundamental problem).

My bet (literally) is that history will show the release was, in fact, an act of desperation and that failure to act more broadly (earlier) to allow industry to address the problem was an error of major proportion. I hope the consequences of that failure are not catastrophic for the Nation, but fear they could be. There are several chapters yet to be written, and one or more could be very ugly, imo.

Heaven forbid one of our major complex refiners goes down this spring/summer. Zero slack in the system.

Joe better hope we have a relatively mild hurricane season