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Oil Could Surge Well Above $100 After Midterms

  • Analysts are becoming increasingly concerned about where oil prices might head following the midterms.
  • The looming EU embargo on Russian oil could send prices significantly higher.
  • The White House’s newly released policy aiming to “strengthen energy security, encourage production, and bring down costs,” fails to address one key issue; underinvestment.
Oil Barrels

With everyone obsessing over UK lettuce and the Fed blowing up the US economy, there was not enough digital ink to discuss the supreme irony of Biden unleashing another release of oil from the Midterm Petroleum Reserve and... oil surging. Unfortunately for the ever more addled president, this is just the start.

On Wednesday, Amrita Sen, co-founder and research director at consultants Energy Aspects, said on Bloomberg TV that the market risks losing Russian barrels in December as EU restrictions on imports and shipping potentially dissuade tanker owners from moving that country’s crude. 

As a result, oil prices “are going to be headed well over $100” going into December while near-term prices are pressured by strikes in France and lockdowns in China that suppress demand. However, once those wear off, Europe will have to stop importing 1m to 1.5m b/d of Russian crude when embargo on seaborne shipments takes effect in December; those barrels - as Zoltan Pozsar explained all the way back in March and April - will have to be shipped to more distant markets with transport times of 30-50 days vs only 3-4 days to Europe, causing surging costs and substantial delays.

Separately, if shipowners decide that the risk of sanctions is too high to move Russian crude “you will lose some shipping and that will tie up more oil.”

This reminds us of something Goldman flow trader Rich Privorotsky wrote in this morning's market wrap (available to pro subs), when we cautioned that he is "getting increasingly concerned about oil market supply beyond the midterms. This proposal from the EU is not helping my anxiety as the proposed oil cap could have some pretty major consequences in the shipping market" Here's why as Bloomberg noted earlier:

“In the event that a vessel under the flag of a third country has transported Russian crude oil or petroleum products purchased at a price above the price cap, it should be prohibited to provide technical assistance, brokering services, financing or financial assistance, including insurance, related to any transport in the future by that vessel of crude oil or petroleum products”

That will certainly spark a profound chilling effect across the entire industry.

But what about Biden's SPR drain - is it really that useless, and won't it help at least a little? Well, according to Sen, limits on how low stocks can be drawn mean sales won’t be as large as some expect (analysts are expecting a release of as much as 100m bbl; with 26m bbl to be released between December and February).

But the clearest explanation why Biden's last-ditch SPR release won't do jack, comes from Goldman's commodity strategists led by Jeff Currie who published a note late on Thursday (and also available to pro subs), in which they write the following: 

Following OPEC+’s surprise 2mb/d cut on October 5, the Biden administration was quick to imply a policy response, concerned about rising gasoline prices fact sheet into November 8 midterms. On October 18, the White House released an energy policy. The speech highlights various ahead of President Biden’s speech concerns and actions taken by the administration to “strengthen energy security, encourage production, and bring down costs.”

The 15 mb SPR drawdown (the final tranche of the 180 mb Spring announcement) drew headlines, but of more interest was the plans to refill the SPR at fixed prices for future delivery “at or below about $67-72/bbl”, offering some support to crude prices below the ‘shale band’. This truncation of the price distribution should encourage investment in growing production - if only marginally. We find marketing and refining margins in the US to be elevated, but the latter is a function of exorbitant international energy prices as well as structurally tight refining markets.

Additional headlines since the OPEC+ meeting have highlighted other policy options available to the Administration. We find incremental SPR sales as the most likely action (16mb is available from FY2023 Congressionally mandated sales), although this remains price dependent: requiring higher prices than present, and likely closer to $125/bbl following the midterms. Such a release is likely to have only a modest influence (<$5/bbl) on oil prices however.

Related: Supertanker Rates Soar As Chinese Refiners Ramp Up Imports

All options have trade-offs. Product export bans, in particular, could send wholesale global distillate/gasoline prices up $150/$50/bbl respectively (to $300/150/bbl) and still risk shortages and higher prices domestically - especially in coastal regions. All responses leave the ultimate cause of energy underinvestment unaddressed.


We continue to expect headlines into next month’s midterm elections as the US administration attempts to exert downward pressure on retail prices. However, we think action at current price levels remains unlikely. This policy reflexivity is reflected in our current forecasts ($115/bbl Brent in 1Q23 ), as the deficits we expect, following OPEC+’s decision to cut, look unsustainably bullish given scarce inventories and our balance outlook. The risk of inventory depletion and price spikes requiring demand destruction as a rebalancing of last resort could yet move prices $30+/bbl higher.

There is more in the full Goldman reports, including an analysis of why a product export ban will exacerbate the global shortage of refining capacity, why a gasoline federal tax holiday would be modest in impact, why easing sanctions on Venezuela is not a quick fix, and why the “NOPEC” bill has only very limited upside.

By Zerohedge.com

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  • Mamdouh Salameh on October 22 2022 said:
    Given the strong fundamentals in the global oil market and the futile EU policies of banning Russian on exports from 25 December onwards and capping the price of Russian crude, Brent crude will rise to $100-$110 before the end of 2022.

    Russia not only has many keen buyers for its crude oil but it also has access to enough oil tankers of its own and insurance services to be able to avoid the G7 oil price cap on its crude exports and continue to sell the bulk of its exports. Moreover shipping Russian oil to China via Russian oil pipelines that traverse the border between them and also via the North Sea Route (NSR) bringing Russian crude from the Arctic could save a lot of transport days and could also prove much cheaper than shipping the oil to Europe.

    Any EU banned Russian petroleum products from 5 February won’t be lost to Russia since China and India with some of the world’s largest refining capacities will be buying more Russian crude to refine and ship to the EU and the United States.

    And even if President Biden decides to release 100 additional million barrels (mb) from the SPR, they will hardly fare better than the 180 mb released earlier in the year and whose impact on oil prices was hardly noticed.

    However, the risk to the US from further SPR releases is mounting first because the SPR is now at its lowest level since 1984 and second because the US Department of Energy (DoE) will find it virtually impossible to replace them. The reason is that US shale oil is a spent force and a tight global market doesn’t by definition have enough oil to spare.
    And if the DoE is hoping to refill the SPR when the Brent crude declines to $70 a barrel, then it is wasting its time since the strong fundamentals in the market will soon push up Brent crude towards $110 a barrel.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment

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