The only time you have too much fuel is when you’re on fire.
Gas prices have gone full beast-mode this month. Just from Wednesday to Thursday alone last week, the average price of a gallon of regular gasoline in California surged by nearly 14 cents to $6.03, according to AAA.
Unfortunately, we don’t see a whole lot of relief in sight. The Biden administration has released vast amounts of oil from the Strategic Petroleum Reserve (SPR), and America’s emergency oil stockpile has now plunged to 40-year lows. That shrinkage of the SPR is limiting government’s ability to shield consumers from the fallout of Saudi Arabia’s super-aggressive in-your-face supply cuts.
Continental Resources chief executive officer Doug Lawler told Bloomberg last week that without new exploration, “you’re going to see $120 to $150” oil, which would imply that this pain at the gas pump is far from over.
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I wrote about this here in Insights a couple of times last September, pounding the table in favor of energy stocks in the middle of the month. The S&P 500 is up 3% since then. Exxon Mobile (XOM) is up 26%.
It’s also why we have been harping on and on about inflation all year and the reality that interest rates are going to stay higher for longer. Triple-digit oil will boost already high prices at the pump, thereby worsening inflation.
It’s important to understand that when we say ”Strategic Petroleum Reserve,” the word strategic carries a lot of weight. The SPR was created to serve as an emergency fund that presidents can tap during times of war or natural disaster, but when you bleed it down by 270 million barrels in two two years, it’s no longer strategic at all. As Daan Struyven, head of oil research at Goldman Sachs, told CNN in a phone interview last week, “Because the level of the SPR is quite low, you would need a larger shock to energy prices or to supply to start releasing barrels again… The hurdle to exercise the insurance policy is bigger when you have less insurance left.”
Duh—you don’t have to be an MIT PhD like Daan to figure that one out.
US officials have stressed that even after the sizable emergency releases, the SPR is still the largest emergency reserve of oil on the planet. “We have, by far, enough to be able to deal with any emergencies over the next couple of years,” Energy Secretary Jennifer Granholm told CNN in July. Unfortunately, Granholm is an idiot, and 347 million barrels of oil in the SPR is only a 17-day supply.
The recent jump in energy prices has been driven primarily by OPEC rather than by any outright emergency. Oil prices hit 10-month highs this month after Saudi Arabia and Russia vowed to extend their supply cuts. That in turn sent gasoline prices surging to nearly $4 a gallon nationally. Gas prices have cooled ever so slightly since then, with the national average for gasoline dipping to $3.83 a gallon on Wednesday, according to AAA.
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Photo courtesy of Associated Press
The Saudis benefit a lot from higher prices, and so does Russia, which is why they too have been holding back supply. And we can’t really blame them; why would they want to sell oil at the price cap we laid on them of $60 a barrel last December when its value in the market is $95? This effect on supply is how price caps work, plain and simple. …We asked for this.
According to Bank of America, world oil stockpiles are expected to tumble by 70 million barrels over the next three months due to the supply cuts, which is why Francisco Blanch, BofA’s head of commodities research, and his team upped their Brent oil price forecast on Wednesday to an average of $91 a barrel in the second half of this year, up from $81 a barrel previously. (Hint: still too low.) “Russia and Saudi Arabia have shown a strong alignment in providing support to the oil market between $80 and $100,” Blanch wrote in a note to clients.
Blanch continued, “The political calculus could start to change above $100/barrel. With a US presidential election approaching, internal OPEC+ dynamics could make a big difference to the oil price outcome next year,” and another spike in energy prices “risks reigniting inflation fears around the world, higher interest rates and eventually financial turmoil.”
Most analysts we talk to are skeptical that Saudi Arabia would let things go much beyond that level because it would essentially be killing the golden goose.
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Our base case is for triple digit oil prices by the end of the year, but $150 a barrel still strikes us as only a tail risk. At some point, China’s economy will begin to bust out of its multi-year doldrums-- and we actually think that’s already starting to happen-- and they’ll begin to consume more oil, thereby providing support for oil prices at current levels if not higher.
· We continue to recommend a somewhat higher allocation to cash than usual.
· We still see private credit and alternatives as attractive.
· As you can probably tell, we continue to like energy stocks.
And we always recommend Metallica:
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