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One of Rigzone’s regular market watchers takes a look at the U.S. debt-ceiling talks, the latest U.S. Department of Energy developments, an upcoming battle for the West Texas Intermediate (WTI) oil price and more. Read on for more detail.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Barani Krishnan, Senior Commodities Analyst at uk.Investing.com: Well, everyone expected some high tension and drama from the U.S. debt-ceiling talks and we got some of that, no doubt, to depress oil. But relatively quick chilling of that heat by Wednesday by both President Joe Biden and his top Republican rival Kevin McCarthy, which helped oil row back into the positive for the week, was just as unexpected.

The other noteworthy, i.e. mouth-gaping, development for the week was the Department of Energy’s announcement that it will finally buy 3.0 million barrels to begin refilling the U.S. Strategic Petroleum Reserve. While a rebuild of the oil reserve in the world’s largest economy should have led to a big bullish push for crude prices, the market went the other way instead on that news.

Rigzone: What were some market surprises?

Krishnan: It was the proclamation oil longs had awaited since President Biden authorized the release of the first barrel of crude from the SPR in November 2021. Eighteen months and nearly 250 million barrels later, the most withdrawn from the reserve in its five decades, the Biden administration says it’s ready for a refill.

In a news release issued Monday, the Department of Energy said it will buy up to three million barrels initially for the SPR under what it described as a ‘three-part replenishment plan’. Oil bulls, of course, couldn’t care about anything else other than - how many barrels will ultimately be purchased and over how long? At this point, the department answered neither of that. Logic, however, suggests that the first round of buying will commence after current congressionally mandated sales from the SPR, due through June, are exhausted. 

The department did offer three points of guidance, though. It said it ‘intends to purchase more oil later this year’. Acquisitions will include outright purchases and loaned barrels, which will include a premium when returned. It also said it has canceled 140 million barrels in mandated SPR sales scheduled for fiscal years 2024 through 2027. 

That last part was probably more academic than anything else as no one, not even President Biden’s closest allies, would expect continued SPR draws over the next four years - not when the reserve’s balance is already at its lowest since 1983. With a little more than 362 million barrels in the reserve, it will take just over 82 days to draw it completely down at a maximum extraction rate of 4.4 million barrels per day (though the norm for withdrawal has been one million barrels daily).

With Monday’s revelation of the administration’s plans for the SPR, one of the announcements most anticipated by the oil market over the past year and a half landed with a dull thud rather than the loud bang that oil bulls had expected. 

Some points to ponder on why the SPR refill plans aren’t so great at this point for crude prices:

• We only have this three million barrel purchase announced by the DOE and its intention to buy more later in the year. At this point, no one outside the administration knows the number of barrels it’s ultimately planning to acquire. There’s no telling whether even the administration knows itself how much it will buy. 
• What we do know is the refill will probably be decided by one thing and one thing only - the price of crude. The administration said toward the end of last year that its aim was to refill the reserve when prices were at or below about $67-$72 per barrel. It wouldn’t be wrong to think that if the market got way beyond that, the DOE will just cancel further purchases. It’s nice to think that the administration will refill barrel for barrel what it took out. The truth is it may get to 20 percent, then stop because the price is no longer advantageous for stockpiling. If the longs in the market think the administration can be held at ransom to refill the reserve completely, they’d better think again. 
• The notion within the DOE is that the SPR is probably not needed as much these days as 50 years ago. As a strategic buffer, its importance cannot be denied. But there are many other ways these days to source the required oil.

While the West’s sanctions over Russia, undoubtedly, form the single largest source of oil supply loss, aside from OPEC+ output cuts, global production of crude has begun recovering from the worst disruptions of the pandemic era. Russia exports and produces huge volumes of crude, cheating on its pledge to key OPEC+ ally Saudi Arabia.

In North America, notwithstanding current wildfires and occasional pipeline issues, Canada remains a stable source of crude supply to the United States, providing just over half of U.S. needs. Domestic U.S. output has also steadied at around 12 million barrels per day, just about a million less than its record high three years. In fact, U.S. shale oil production is set to rise to the highest on record in June, the Energy Information Administration, a unit of the energy department, said in a forecast.

Outside of the United States, Iraq’s production is projected to grow 25 percent over the next five years. Iran’s oil exports are reportedly at their highest since 2018 despite sanctions from the days of the Trump administration. In Venezuela, Chevron will begin a new phase of higher production next month. 

And last but not least, Guyana’s oil exports jumped 164 percent last year. Rystad Energy also estimates Guyana will be pumping 1.7 million barrels per day by 2035, which is higher than other major offshore basins including the Gulf of Mexico, ranking the country as the world’s fourth largest offshore oil producer.

Rigzone: What developments/trends will you be on the lookout for next week?

Krishnan: A battle between $70 and $74 on WTI.

To contact the author, email andreas.exarheas@rigzone.com