Brent oil price is hovering around $90 a barrel, trying to decide whether to rally north of $100 or break down below. There is a big two-way pull between the bulls and the bears: Will the White House energy policy of draining the strategic reserves to get the oil price down ahead of the midterms leave the U.S. exposed to very low spare capacity? Or will demand fade?
There is no doubt that inventories are low, with product inventories trading below five-year averages and U.S. SPR crude inventory levels are at 40-year lows today.
President Joe Biden made the decision this spring to release 180 million barrels form the SPR, which is coming to an end soon. Last week he announced that he will release up to 15 million barrels more, and would be willing to refill the SPR by buying it back around $70/WTI. That all sounds well and good if Biden were to buy this oil at a lower price, given the U.S. started selling it north of $125/bbl at the height of the war. It also assumes a big "if" the oil price were to be lower when the U.S. does decide to refill supply. However, given crude inventories are at lows, this may come across as wishful thinking and most in the market are certain the U.S. will need to buy back oil at much higher levels.
Taking the other side, demand is one factor that a lot of the bulls could be blind-sided on. Most analysts are assuming a big fourth-quarter demand pick-up, along with Chinese demand to soak in all the excess barrels and cause a price rally. Seasonally, the fourth quarter does tend to see a pick-up in winter heating demand. Considering we are starting at pretty low levels, this can pose a problem, but if demand is weaker globally, then Biden may end up trading the SPR perfectly.
There is a huge debate whether about the U.S. is in fact in the midst of a recession, as technically a recession is defined by two or more successive negative quarters of negative gross domestic product growth. Judging by the way the bond, credit, and foreign exchange markets are trading, we seem to be on the precipice of one. If the world indeed does head into a recession, then perhaps oil prices and commodities in general will fall a lot more to reflect that demand slowdown. This coupled with China's Zero-Covid policy, which was stressed again in China's plenum meeting this past week, suggests that China is nowhere close to reopening. Looking at the Purchasing Managers Index, Institute of Supply Management and demand indicators, the rest of the world is slowing down fast.
The tightness in oil really comes from the products market in distillate and gasoline. This tightness has been exacerbated by the fact we have one to two million barrels a day of refining capacity offline due to methenamine season and Chinese refinery closures. But as they come back, refining margins are soon set to ease the inventory tightness that is being talked about. Perhaps without knowing it, Biden will be fortunate enough to be able to buy back his Oil at sub $70/bbl.
As they say, sometimes it is better to be lucky than smart.