Daily Energy Report
Russia’s oil revenues, US SPR refill, Europe’s gas concerns, oil majors and renewables, Venezuela’s exports, and more
CHART OF THE DAY
Figure (1) above shows Russia’s monthly oil revenues since the beginning of 2022, just before the invasion of Ukraine, versus spot Brent prices. It also shows the International Energy Agency’s estimate of Russia’s oil revenues in February, which is lower than what was announced by the Russian government, and also our own estimates.
EOA’s Main Takeaway:
The strong correlation between oil market prices and Russian revenues indicates that the G7-led price cap has no impact. The drop in Russian oil revenues is related to the general decline in oil prices. The IEA’s estimates ignore the fact that some of the Russian oil is being sold above the price cap.
STORY OF THE DAY
US Energy Secretary Jennifer Granholm said yesterday during a congressional hearing that this year “will be difficult” for the US “to take advantage of this low price” to refill the US Strategic Petroleum Reserve (SPR).
"But we will continue to look for that low price into the future because we intend to be able to save the taxpayer dollars,” Reuters quoted Granholm as saying. It will take “a few years” for the US to refill the SPR, she added.
EOA’s Main Takeaway
This was predicted by our team a long time ago. The announcement, however, has no impact on oil prices, and linking the decline in oil prices today to Granholm’s statements does not make any sense.
The fact is that the US does not need an SPR holding 600+ million barrels when the shale revolution has added about 8 mb/d (2.9 billion per year, or more than two full SPRs). The US also does not need to store hundreds of millions of barrels of light crude oil, when it is the largest producer of light crude in the world, and all its imports are medium and heavy sour crude oil!
The SPR was created to cover disruptions in oil imports. Historically, oil companies have borrowed crude from the SPR during hurricanes in the Gulf of Mexico. All the lost production was sour crude! So, the question here is why should the administration keep large amounts of light sweet crude in the SPR?
The US lived without a civilian SPR for several decades during which the country witnessed major wars, including World War I and World War II. The SPR was later established in the 1970s following oil crises that called for a strategic oil reserve, such as the 1973-74 oil embargo. Former US President Ford “set the SPR into motion” on December 22, 1975, when he signed the Energy Policy and Conservation Act (EPCA).
Last year saw the largest release of oil from the US SPR in history. The reserve currently holds about 371 mb after Washington sold about 221 mb in 2022 to lower oil prices and fulfil the congressionally mandated sales (see Figure 2 below). The Department of Energy (DOE) still needs to meet its obligation to Congress to sell 26 mb of crude oil from the SPR in Fiscal Year 2023 by releasing 26 mb. The DOE announced it will sell them between April and June.
But the current level in the SPR is more than enough to meet any emergency, and this is what we told readers in our Daily Energy Report on March 3.
Last November, our own Dr. Anas Alhajji said in an online discussion about the role of the SPR in the oil market that researchers, analysts, politicians, and others need to focus on the optimal level of the strategic reserve in the current situation and avoid being influenced by the hype surrounding the issue of refilling it. Any other number or level has no impact on the oil market.
The Republican Party which has accused the Biden administration of draining the SPR is the same group that called in the past for ending the strategic reserve. Even in the 1990s, some House Republicans wanted to “dismantle the Department of Energy” altogether.
When it comes to the issue of refilling the SPR, there are three questions that need to be asked:
What is the amount of the refill?
At what price?
Does it make sense to refill the SPR when the US administration still needs to sell the congressionally mandated amounts?
With respect to the first and second questions, there is a key detail to highlight: the idea that the US is going to buy oil at a fixed price in the future to refill the SPR carries uncertainties because nobody can tell whether the price will be too low or too high. Some will wonder what the consequences will be if the fixed price could not be reached. In that case, Washington won’t be able to refill the strategic reserve. But even if that happens, it won’t be a major problem.
There have already been talks at the US Congress between Republicans and Democrats about having a small SPR, so this could be the beginning of such a plan. We said this in early November 2022, and you can watch the full discussion here.
NEWS OF THE DAY
“A change is on the horizon for oil demand, with India set to eclipse China as the most important driver of global growth — and potentially the last, as the world shifts to a greener future,” Bloomberg wrote.
EOA’s Main Takeaway: