Crude oil could be the next Meme stock
Last week, US President Joe Biden ordered the release of another 15 million barrels of oilfrom the Strategic Petroleum Reserve (SPR). This is the last tranche of emergency release of 180 million barrels of oil announced in March this year.
The massive release of oil has resulted in the lowest level of SPR since 1984. This is only sufficient to last 22 days of daily consumption in the US.
This has left the US in a short squeeze position and could result in a Fear Of Missing Out (FOMO) buying action from the US if oil price surge to above $100.
Here are my insights:
- Alarming to have low levels of SPR
- US vs OPEC+
- Biden vs Oil producers
- Replenishment of SPR could lead to a FOMO moment
Alarming to have low levels of SPR
The result of Biden’s action has resulted in a 32% drawdown of SPR this year. The US emergency oil reserve is currently at 405 million barrels, its lowest level since June 1984.
The 180 million barrels of oil reserve release is unprecedented in the past thirty years. The largest release previously was in 1991 when US President George H.W. Bush released 17 million barrels of oil during the first Gulf War. Another large release was in 2005 when President George W. Bush released 11 million barrels when Hurricane Katrina struck the US. Hence, the 180 million barrels released this year is about 10 times more than its previous releases.
At current levels, the SPR is dangerously low. The US consumes about 20 million barrels of oil each day. This implies that the SPR can only last for 22 days.
Such low levels means that SPR is no longer strategic. In fact, it is laughable for the world’s only superpower to have such ridiculously low level of oil reserve. This leaves it exposed to any emergencies such as war or natural disaster. One would thought
The low level of SPR is even more alarming when one considers that the US is a difficult geopolitical situation with Russia and China.
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US vs OPEC+
Oil supply has been caught in a tussle between the US and OPEC+.
Last year, the US released 50 million barrels of oil reserves together with China, Japan, India and South Korea and the UK in December last year. This year, the US will release 180 million barrels of oil. The massive release of oil reserves has led to a decline in crude oil price.
On the other hand, OPEC+ prefers oil prices to stop declining.
OPEC+ has plans to cut production by 2 million barrels per day (bpd), on top of an earlier cut of100,000 bpd inSeptember.
At the current price of $84.5, crude oil price has crashed 33% from its high in June this year. The US is winning in the fight to bring oil prices down.
But, with only 22 days of oil reserve left, the US is running out of ammo to outlast the fight. And OPEC+ has just begun the fight, with a miniscule cut in production on September.
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Biden vs Oil producers
President Biden is beratingthe domestic oil producers for profiting off the high oil prices.
But this is strange.
It does not make sense to blame oil producers asUS oil production is already at a record high with almost 12 million barrels per day. This is about 9% increase, or 1 million barrels per day, compared to when President Biden took office.
Also, the best way to have lower oil prices is to increase supply by producing more oil domestically.
However, the Biden administration seems to be discouraging domestic oil production. Shortly after taking office in 2021, Biden signed an executive order that suspended new oil lease sales. Even after a Louisiana federal judge blocked government officials in using climate change calculation on oil producers, the Biden administration continue to delay decisions on new oil and gas leases and permits at federal lands and waters.
The net impact is that domestic oil producers are not raising capital expenditure to produce more oil. Instead, they are using their cash flows to pay dividends and buy back their stock.
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Replenishment of SPR could lead to a FOMO moment
In a factsheet released by the White House, the US announced its intention to repurchase crude oil for the SPR when “prices are at or below about $67-$72 per barrel.”
The Department of Energy has extolled the virtues of the emergency release of oil reserves this year. The US believes that the taxpayer interests are protected because the US will be “repurchasing at a lower price than recent sales, potentially allowing it to repurchase more oilthan it released with sale proceeds.”
This will be ideal if the US succeeds in repurchasing crude oil below $72.
However, the converse will be true if the US is forced to repurchase crude oilhigher than its sales price. This could be a reality because the US does not have much buffer in its oil reserve. In fact, the US may need to purchase at least 180 million barrels of oil to bring its SPR to its 2021 level. This is a huge amount in a tight oil market.
One would remember that the prominent Meme stock GameStop rose over 30 times in an epic short squeeze in January last year.
Similarly, the US could be in a vulnerable short squeeze position due to its ultra-low SPR position. In an extreme scenario, if crude oil prices surge to $100 and above, the US could engage in a FOMO momentand purchase crude oil to replenish its low SPR position. This will then create a vicious feedback loop of forcing oil prices higher, and possibly push oil prices to $200.
Of course, this is a far-fetched scenario.
But anything is possible with crude oil. It has even gone negative before, in 2020.
$200 oil price could just be possible.
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