Bullish oil market could complicate Biden’s oil reserve refill plan
Jeremy Beaman
Video Embed
Oil prices rose to their highest mark in nearly a month on Tuesday, potentially posing challenges to the Department of Energy‘s plan to begin refilling the Strategic Petroleum Reserve using fixed-price contracts following President Joe Biden‘s record-breaking drawdowns.
The rally and associated bullish factors could dissuade producers from pursuing contracts to sell crude oil at the administration’s desired price of between $67 and $72 per barrel to refill the SPR, which Biden tapped to the tune of more than 200 million barrels on an emergency basis in response to the oil market volatility driven by the war in Ukraine.
ADMINISTRATION ANNOUNCES PURCHASE OF OIL FOR RESERVE, FIRST SINCE BIDEN DRAWDOWNS
The Department of Energy is soliciting bids from producers through Wednesday morning to acquire up to 3 million barrels of crude oil under a “pilot” of the fixed-price repurchase mechanism developed by the Biden administration to encourage the oil industry to begin investing more aggressively in additional production. The administration announced the novel repurchase option in October alongside its intent to begin refilling the SPR when West Texas Intermediate, the U.S. benchmark oil futures contract, reaches a range of $67 to $72 per barrel.
WTI reached that range several days earlier in the month, leading the administration to begin soliciting bids on Dec. 16, but WTI has crept up in recent days and traded above $80 per barrel Tuesday before falling back down.
Bullish factors include rising demand in China, where tight COVID-19 restrictions have been lifted in recent weeks, and the prospect of reduced oil output from Russia in retaliation against the G-7-led price cap on Russian oil, which could send prices up further.
Additionally, the Energy Department’s pilot 3 million-barrel solicitation provides for deliveries to take place in February of 2023. WTI, indexed on the Chicago Mercantile Exchange, shows prices holding above $79 per barrel from February through July 2023, another possible reason for producers to take their chances with the market rather than compete for the government’s business.
The Biden administration has gone after oil producers for much of the year for spending too little on additional production, criticizing the industry’s conservative capital strategy as un-American.
Some oil majors such as Chevron and ExxonMobil have promoted their plans to increase production in the Permian Basin in response to criticism, although other producers have defended their capital plans and stressed that new investments expose them and investors to risks if prices crater.
DOE’s fixed-price contract tool was designed to be a shield against risk by ensuring producers have a customer in the federal government willing to buy at a set price.
Fixed-price contracts “can give producers the assurance to make investments today, knowing that the price they receive when they sell to the SPR will be locked in place,” the department said in its October announcement of the new SPR acquisition option.
“It’s always in everyone’s political interest to just kind of let oil prices fall as much as possible on some short-term sense. But if you care about the long-term stability and stuff, that’s why you do this,” Skanda Amarnath, executive director at economics research outfit Employ America, told the Washington Examiner of DOE’s new solicitation.
“Supporting prices has got an important benefit for keeping prices stable over the long term, avoiding spikes, giving industry a little more confidence about investment,” added Amarnath, who was integral to the development of the DOE’s repurchase strategy.
At least one prominent oil executive, Chevron CEO Mike Wirth, recently dismissed the administration’s strategy out of hand as not offering a “meaningful” incentive to producers.
Wirth and others within the industry have been lobbying for looser regulations and easier access to federal parcels from the administration, which has implemented new regulations and sought to restrict acreage available for oil and gas leasing.
Oil markets have seen incredible flux in recent months. WTI has ranged between $71 and $92 per barrel since early October.
Bearish factors also remain in play, especially in the prospect of a recession that could send oil demand, and therefore prices, plummeting.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Amarnath stressed that the DOE’s plan for refilling the SPR provides an “insurance policy” for the oil industry in that kind of event.
“There are a lot of producers. It doesn’t have to persuade Chevron; it can persuade someone else,” he said. “If I said I have a contract with you and you know that the production that comes out of this well pad is not going to sell for a price below x, that’s really helpful.”