NRGU - U.S. faces limitations in refilling strategic reserves despite oil near $70

2023-12-06 06:57:43 ET

Energy prices keep on slipping, with benchmark West Texas Intermediate ( CL1:COM ) so far down 22% in the fourth quarter and the average price of stateside gasoline falling 16% to $3.21 a gallon. It comes as the U.S. continues to pump crude at a record rate, cranking out a record 13.2M barrels a day, which is more than oil-exporting heavyweights Russia and Saudi Arabia. The developments have been a boon to the American consumer, as well as the Federal Reserve, which continues to receive much applause from the market by keeping inflation at bay.

Bigger picture: OPEC members have been forced to respond to record U.S. production, with tensions most apparent in the reactions from kingpin Saudi Arabia. So far the Kingdom's strategy has been to slash more output, but the deeper cuts have not resonated with oil bulls and have even formed some cracks within the OPEC+ group. Economic weakness in China, Russia's shadow fleet and the removal of fear premiums from the Israel-Hamas war have also helped contribute to oil's decline, and the Saudis are hesitant to go nuclear by opening the taps, which would dent U.S. shale but cause it to lose many OPEC friends in the interim.

Many have also been eyeing recent developments to see whether the U.S. will refill the Strategic Petroleum Reserve, which has fallen to its lowest level since the 1980s following the release of 180M barrels last year . At the time, the Biden administration said it would consider refills "at or below about $67 to $72 per barrel," but there have been opportunities that have been passed up when oil retook that range. WTI crude is now trading at around $71, and while the administration has been adding to the SPR, the buybacks have been limited to about 3M barrels per month given physical constraints in "the way the caverns are set up."

The technicals: "The price of crude oil is likely to continue falling from current levels before settling at $70 at the major support," writes SA analyst Damir Tokic . "Even though I agree with the bearish outlook, I would not recommend shorting crude oil - the geopolitical situation could change in a moment. In this situation, a long-put option strategy seems appropriate."

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