Idle Rambling Regarding The SPR Release -- April 3, 2022

For me, this is the most interesting chart at the moment. A huge "thank you" to the reader who reminded me.

At the link, the chart goes on forever.

There are ten columns.

The first column is the day futures expire/come due -- however you say it.

The second column is what traders are willing to pay now for guaranteed physical delivery of WTI in the month indicated.

The third column is the change from the previous close. 

The eighth column is the volume.

So, let's look what happened almost immediately after President Biden announced the largest SPR release in history.

Go to the third column and scroll down and look at all the GREEN but also look at the remarkable increase in what traders are willing to pay. I would assume folks that actually use the oil (like refiners will take the delivery at the indicated price) whereas Wall Street traders will want to flip it at a higher price than what they paid. Readers can correct me on that. In other words, the price in the third column is the "floor" as of today; it will flip at a higher price, all things being equal.

So, again, immediately after the SPR release announcement, the price of oil increased significantly in the months beginning as soon as August, 2022. 

I think one can sort out what this means down the road. Look how much futures jumped in mid-2024, just preceding the presidential election. 

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What This Means For E&P 

In a sidebar to a reader, what I think this means for US shale operators:

In the past, I do think there was a bit of drilling for "bragging rights" and having the best quarter compared to one's peers. That's still true, having the best quarter compared to one's peers, but the focus has changed.

It's always about bottom line: margins, earnings, revenue, and guidance; but, in addition to that, the focus is going to be on tangible returns for the shareholders: free cash flow, quarterly dividends, special dividends, buybacks, etc., and all of that means less drilling in an expensive drilling environment.

One just wonders how much their thinking has changed -- the thinking of the CEOs in the past who were always eager to do more drilling .... now to generate more cash.

Look at that barchart.com link again. CEOs are being reassured that the Biden announcement will result in sustained high prices and perhaps higher prices in the out years giving CEOs breathing room to maintain current strategy.  

We're entering a golden age for US oil sector. 

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The SPR

What the unprecedented SPR release means: see this post.

The huge release means:

• it makes it more difficult for future presidents to release even more oil from the SPR
• in other words, this was the the most incredible decision ever;
• it certainly suggests a moment of panic; a last-ditch effort to restrain oil prices;
  
• the SPR has become less of a political tool;
• or more bluntly, the end of the SPR as a political tool;
• after November, 2022, not much, if any, SPR oil remains to be used to help pay US budget deficits;
• the SPR will never be refilled to its maximum in my investing lifetime, and perhaps never;
• very, very unlikely that SPR will be filled with oil that is less expensive than it is now;
• US shale operators are pretty much guaranteed higher prices longer;

For US shale investors: this may be the single most bullish event in decades.

• it's possible US shale operators will see even higher prices than currently imagined

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What Do Others Think?

Link to Alex Kimani.

And, make no mistake about it: the oil markets are likely to remain undersupplied for years to come, whether the Ukraine crisis is quickly resolved or not, thanks in large part to years of underinvestment amid the ESG boom.

According to the leading energy experts, the oil markets will almost certainly face huge deficits that could last for years. 

In its March 16 report, the IEA warned of a potential global oil supply shock, with ~3 million b/d of Russian oil production likely to be shut-in in April. The Paris-based watchdog also projects lower demand growth for 2022 by 1.1 million b/d to 2.1 million b/d, thanks to reduced Russian consumption and higher prices. 

The main reductions in the IEA growth forecast by country were Russia (430kb/d), the U.S. (180kb/d) and China (70kb/d). 

However, the EIA is more conservative than the IEA in cutting its 2022 forecast by 415kb/d to 3.13mb/d and increasing its 2023 forecast by 77kb/d to 1.95mb/d. While acknowledging the scale of the potential demand risks, the OPEC Secretariat has maintained its 2022 demand growth forecast at 4.15mb/d. 

Meanwhile, commodity expert Standard Chartered has become even more pessimistic about the Russian outlook. In its March 9 report, StanChart lowered its 2022 forecast to 1.94mb/d, nearly a million b/d lower than its February forecast. 

Irina Slav comes to same conclusions that "The Million Dollar Way Blog" reached a couple of days ago. For US shale investors, this is just an incredible gift.