No Relief In Sight For Gas Prices Or Biden

Oil prices extended a bull run Tuesday after the EU agreed to a partial and phased ban on Russian oil and China lifted some of its coronavirus restrictions amid rising demand for gasoline ahead of the peak summer driving season.

International benchmark Brent crude surged over $124 a barrel – its highest since March 9 – before dropping back to $117 a barrel on Wednesday. By breaking through $120, from a technical trading perspective, crude is now more likely to climb toward $150 than retreat under $100.

Benchmark U.S. West Texas Intermediate (WTI) crude is now trading around $118, also the highest since March 9.

This bodes poorly for retail gasoline and diesel prices for consumers since crude feedstock costs account for about 60 percent of prices at the pump.

Markets are responding to the EU’s agreement in principle to cut 90 percent of oil imports from Russia, the bloc’s toughest sanction yet on Moscow since the invasion of Ukraine three months ago.

Once fully adopted, sanctions on crude oil will be phased in over six months and on refined products over eight months. The embargo exempts pipeline oil from Russia as a concession to Hungary.

As two-third of the Russian crude oil exports are seaborne, it means around 1.5 million barrels a day of oil will need to be replaced by the EU. But this volume is actually closer to 2.2 million barrels a day as both Poland and Germany are planning to phase out pipeline purchases by the end of the year.

On the production side, the OPEC-plus group, which includes Russia, is set stick to a modest July output hike of 432,000 barrels a day when it gathers on Thursday. That means OPEC-plus will offer no help to this under-supplied market. Relations between the United States and OPEC-plus leader Saudi Arabia have deteriorated under President Joe Biden, who continues to seek a new nuclear deal with Iran, Riyadh’s arch enemy in the Middle East.

Oil prices are also being pushed higher as Covid lockdowns ease in China, the world’s top oil consumer. Shanghai has announced an end to its Covid lockdown and is now allowing people in China’s largest city to leave their homes and drive their cars.

Many parts of the United States are already dealing with $5 a gallon gasoline prices at the pump, and the upward trajectory will continue as the peak “summer driving” demand season ramps up after last weekend’s Memorial Day holiday.

The situation is getting dire as leading indicators point to a yawning supply gap.

Domestic gasoline inventories are 19 million barrels, or 8 percent, below the 2017-21 average, according to data from the Energy Information Administration (EIA), while domestic distillate stocks are down 17 percent from a year ago. We’re well on our way to $6 a gallon gasoline in this country unless drivers decide the price pain is too much and start cutting back on travel.

The benchmark diesel contract on the Nymex continues to creep higher, trading at around $4.10 a gallon. At the pump, diesel prices average $5.60 a gallon.

Refineries cannot keep up. In the week ending May 20, U.S. capacity utilization was at 93.2 percent, toward the top of the five-year average, and yet refiners still couldn’t crank out enough product to satisfy rising demand.

A large reason for their inability to catch up stems from several refinery closures that have occurred since the first wave of Covid-19 hit in early 2020. Refiners have shed some 1 million barrels a day in capacity, and globally the loss to downstream capacity has been about 4 million barrels a day since the pre-Covid era.

Low inventories – for both crude and refined products – inadequate refinery capacity and high crude prices are a recipe for higher prices at the pump.

Even strategic reserves are reflecting the widespread tightness. According to the EIA, the US Strategic Petroleum Reserve (SPR) held 532 million barrels as of the end of week ending May 20 — its lowest level since 1987.

SPR stocks have declined by over 100 million barrels since late last year due to efforts by the Biden administration to stem the rapid rise in motor fuel prices.

Releases from the SPR are adding about 1 million barrels a day of crude, which is helping alleviate some of the tightness in the market. But markets are more focused on the structural deficits in upstream and downstream capacity, for which there appears to be no solution due to chronic underinvestment in the oil industry.

President Biden is under heavy pressure to “do something” to bring down energy prices, but the options are few and the White House looks lost when it comes to oil markets.

Biden is considering tapping strategic heating oil and diesel reserves in the Northeast, where shortages are the most acute. But just like previous SPR releases, it’s a Band-Aid approach to a structural problem. Traders know the use of strategic reserves is a short-term solution to a problem that’s not going away any time soon. They will eventually price in the fact that our rainy-day reserve is depleted and raise prices accordingly.

The White House also has not ruled out curbing U.S. producers and refiners’ ability to export crude and products. But oil and refined product shortages are global, and curtailing exports would hurt our allies in Europe – who need our supplies more than ever now as they try to wean off Russian energy.

Meanwhile, Biden continues to advance his climate agenda, blocking pipelines, forcing companies to increase disclosure of greenhouse gas emissions, and putting new oil and gas leasing on federal lands on ice. This sends the wrong message to the oil industry when it comes to new investments in supply projects.

Most egregiously, Biden and the Democrats are blaming the oil industry for “price gouging” even though there is no evidence to support their claims.

How can you rally the oil industry to increase supply when you are simultaneously slamming it – falsely – for price gouging? That’s poor messaging and worse policy.

The administration must understand that the low-carbon energy transition will advance much more slowly than it envisioned. Oil and gas will have a huge role to play in our economy for decades to come. Until we collectively accept this and promote higher, responsible investments in new supply, we are going to grapple with high prices.

Or energy prices will move so high that they destroy demand – people cut back or stop driving altogether instead of paying $6 for gas. That could send the economy into a deeper tailspin than economists are already predicting. The Biden administration would be wise to shelve its climate agenda and deal with the problem at hand: energy prices – and an economy – that are spiraling out of control.