A month ago the national average price for mid-grade gasoline was $3.78. Today it is $4.014. The price for West Texas Intermediate is now over $85 a barrel up from $67 not too long ago.
Wall Street is betting that the price of crude will go higher. Data from the Commodities Futures Trading Commission shows money managers raised net-long gasoline positions to the highest levels since March 2020.
Gasoline futures are up 36% since December.
Drain Game
Two years ago at the start of the Russian invasion of Ukraine and coincidentally in time for the midterm elections, President Biden sold off 180 million barrels from the Strategic Petroleum Reserve (SPR).
This pushed the price of oil lower to stave off talks of inflation. It depleted the SPR reserves and the Democrats held onto more seats than was expected.
This would have been a solid plan – selling high and buying low. I would have been all for it had the President remembered to buy low and refill the SPR at a cheaper price than he sold it for.
But, alas, like a rookie trader, he waited. And now they have stopped trying to refill the SPR at all.
According to Yahoo!Finance:
“The Energy Department said it was “keeping the taxpayer’s interest at the forefront” in its decision not to purchase as many as 3 million barrels of oil for a Strategic Petroleum Reserve site in Louisiana. The plan for the barrels to be delivered in August and September had been announced in mid-March.
The move follows a rally in crude prices, with US benchmark West Texas Intermediate on Tuesday breaking above $85 a barrel for the first time since October. The Biden administration has a target to buy oil at $79 or lower to refill the reserve, though spent an average of about $81 a barrel in its latest purchase of 2.8 million barrels late last month.”
Here are the SPR Levels:
There are several reasons to be concerned about the SPR. It was established so that the Saudis couldn’t ruin our economy like they did in the 1970s, as well as a source of fuel in times of war.
These days the U.S. is hitting record oil production due to fracking and is a net exporter. You could make the argument that we have outgrown the original need for the SPR.
The main takeaway from the SPR saga is that Biden can’t sell off the second half of the SPR before the next election. That shot has been fired. The SPR is one less hurdle for the price of oil to move into the $90s.
Granted the Saudis are still sitting on their cap, limiting OPEC production, a situation that could change for any number of reasons. That said, the Saudis would like the oil price higher so that they can fund their linear city in the desert.
No, oil prices are heading higher due to wars in the Middle East, the Ukraine drone strikes against Russian refineries, and the renewed demand from China and India.
If you aren’t in oil you should be. Producers, service companies, and tankers are all trending higher. Subsea & S.A. (SUBC.OL) just hit an all-time high breaking out above a 20-year consolidation pattern. Tanker companies like Scorpio (STNG) are at an eight-year high (I own STNG personally). And producer Diamondback Energy (FANG) is another one at an all-time high (I own that one too – hey, I put my money where my mouth is).
Next up on the value chain will be the small-cap explorers. They are just starting to percolate. The good news is that when they decide to run they tend to turn into ten baggers.
All the best,
Christian DeHaemer
P.S. Make sure you don’t miss these other oil articles:
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