What The White House's Refusal To Refill The SPR Means For Oil

Politics, Geopolitics & Conflict

After some 150 soldiers were killed this week in renewed fighting over Nagorno Karabakh, Armenia and Azerbaijan have agreed to a ceasefire. This 'frozen' and oft-unfrozen conflict dates back to the 80s, with territory considered as belonging to Azerbaijan but home to a large Armenian population, making for an untenable situation. Renewed fighting in 2020 led to Azerbaijan regaining control of territory here occupied by Armenia. Russia is the key to brokering ceasefires here.

In Iraq, there have been no new incidents of clashes in Baghdad or, importantly, in oil-rich Basra, but neither has there been any progress in solving the political impasse. We are keeping an eye on Turkish efforts to regain some lost influence here, as well as the Islamic State's attempts to regroup amid the power vacuum and chaos-all of which will also impact Baghdad's ongoing efforts to take control of oil in Iraqi Kurdistan.

Energy Markets

The White House threw up a test balloon earlier this week, suggesting that it could refill the SPR when oil sinks below $80-according to Bloomberg, citing an anonymous WH source. The point ostensibly would be to protect U.S. crude production growth and keep prices from plummeting by creating artificial demand via refilling the SPR to the tune of more than a hundred million barrels. (This would be at a time when inventory is currently at only 434 million barrels, compared to 593 million at the beginning of the year). But just a day later, the DOE said it had no such price trigger, and that it would not look to refill the SPR until the end of Fiscal 2023. Prices fell after the DOE's denial, although letting the SPR sink to even lower levels through additional drawdowns and letting it stay there could also be seen as bullish. There are roughly 30 million barrels still to be released from the SPR through October. Since mid-April when the additional SPR releases began, U.S. crude inventories excluding SPR have increased by 16 million barrels so far. Meanwhile, the SPR has drawn down 122 million barrels since that time, for a net loss of 106 million barrels of oil in commercial and SPR-or a loss of roughly 4.8 million barrels per week. U.S. production would have to increase (or demand/exports to decrease) by 685,000 bpd just to keep even-and that's without replenishing the SPR. By October, when the releases end, the SPR should be well below that in commercial inventories. From that point on, commercial inventories will have to carry the weight of the weekly shortfall. Unless crude exports stop, there will be no replenishing of the SPR whether the DOE plans to do so or not-the oil simply isn't there.

The railroad union and its workers reached an agreement in the 11th hour, averting a possible catastrophic disruption in transportation and supply chains across the United States. The energy industry was staring down a potential disruption in ethane and coal, for starters.

Total has cut its production by 50% at its 238,000 bpd Port Arthur refinery in Texas due to a planned shutdown of two sulfur recovery units. The maintenance should last about two weeks.

The latest from Moscow is an announcement that the defeated Nord Stream 2 will now be replaced (from Russia's gas flow perspective) by the Power of Siberia 2 pipeline to China. Moscow says the two countries will be signing a deal in the near future for the delivery of 50 billion cubic meters of gas per year via this pipeline. The Power of Siberia2 victory dance comes after a high-level meeting between Putin and Xi this week.

The Bulgaria-Greece interconnector is currently being tested, with commercial quantities of nat gas expected to begin flowing on October 1. Bulgaria is set to receive 1 bcm of gas per year from Azerbaijan when the line begins flowing.

Croatia has asked oil and gas firm INA to increase its production of gas by 10%, to be sold to the state-owned power utility HEP. While this was the mandate, ordering a company to produce more doesn't make it so, and critics say there are limited opportunities to increase production unless fracking is employed-which Croatia is, for now, unwilling to do.

The Czech government is looking to spend 1.2 billion euros to help 8,000 large companies as energy prices continue to make it difficult to do business. The support will be available for companies to draw on starting November 1. The businesses that will have funds available to them, include those in the manufacturing, metallurgical, forestry, and agriculture industries.

Discovery & Development

The battle over fracking in Colombia continues. This week, Ecopetrol has asked the country's regulator to suspend two pilot fracking contracts for 90 days. The two projects are joint projects with Exxon. The two projects could be canceled entirely if a new law backed by President Petro passes congress. The project has been fraught with controversy, first gaining the license to frack only to have it clawed back, with environmental groups and community members opposed to the projects. At this point, only pilot projects have so far had the go-ahead for fracking, with fracking in general not permitted in the country.

Kazakhstan has plans to sell 107 exploration and development licenses for oil and gas blocks-23 of which will go exclusively to the state-run companies KazMunayGas and Qazaqgaz. The offering will include prospective tracts as well as those in which oil and gas have already been discovered-it also includes onshore and offshore, in shallow waters. It will be an online auction. Kazakhstan has the largest proven oil reserves in the Caspian Sea region. Kazakhstan has seen disruptions in oil production and exports in recent months.

Deals, Mergers & Acquisitions

Crestwood Equity Partners LP will divest its gathering and compression assets in the Marcellus to Antero Midstream for $205 million, which includes 72 miles of dry gas gathering pipelines and nine compressor stations with 700 MMcf/d of compression capacity. The deal is part of Antero's strategy to obtain Marcellus assets.

While energy continues to outperform on the TSX, Calgary-based Tamarack Valley Energy Ltd has now cleared the way to become the biggest player in Alberta's Clearwater unconventional oil play with its announcement of the acquisition of Deltastream Energy Corp in a nearly US$1.1 billion. The acquisition will add 23,000 barrels per day of oil equivalent to Tamarack's production next year.