Oil Jumps After OPEC+ Makes Surprise Output Reduction
OPEC+ made a surprise announcement to reduce daily oil production by 1.16 million barrels per day (BPD), increasing total cuts to 3.66 million BPD.
The 3.66 million BPD represents 3.7% of global demand. Analysts predict oil could jump by $10 per barrel. By midday Monday, oil jumped $4.90 or 6.48%.
The announcement came following a statement from U.S. Secretary of Energy Jennifer Granholm, stating that the U.S. would probably not replenish the strategic petroleum reserves (SPR) in 2023. “The U.S. is unlikely to take advantage of a recent drop in prices to start buying crude for the U.S. Strategic Petroleum Reserve this year,” stated Granholm on March 23.
Last year, President Biden stated that the SPR would be refilled if oil fell to $72 a barrel. Also, Congress approved $500 million in the December Omnibus bill to replenish the SPR. On March 17, crude reached a 15-month low of $66.61/barrel. The market was expecting the U.S. to replenish the SPR, but it did not. Granholm stated the reason was that two storage facilities were down for maintenance.
Goldman Sachs thinks Granholm’s statement contributed to the OPEC+ decision. OPEC+ stated it is taking preemptive steps to protect itself from a potential decrease in global demand. "The refusal to refill the U.S. SPR in the fiscal year 2023, although WTI lows that were previously characterized as sufficient to refill, may have contributed to the OPEC+ decision to cut too," said Goldman Sachs. In response, Goldman Sachs has increased its December 2023 oil price prediction from $90 to $95.
The Biden administration stated that the reduction was "unadvisable" under current market conditions. High inflation and rising interest rates have strained the global economy. Global banks are beginning to stabilize from the crisis after two U.S. regional banks collapsed. Higher oil prices will present a new variable in the ongoing fight against inflation.
The International Monetary Fund studied oil price shocks to inflation from 1970 to 2015 across 72 economies. The study found that a 10% increase in oil prices translates into a 0.4% inflation increase. A rapid inflation spike of 0.4% would provoke the Fed to raise interest rates higher than previous market predictions and possibly destabilize the banks.
Also, another study conducted by Seeking Alpha found that gold and oil prices correlated more than 80% of the time since 1971. The study found close to a 2:1 ratio between the increase in the oil price to gold price with a slight time lag. For example, if oil raises 5%, over time, gold raises 2.5%. The chart shows the price movements of gold and oil. Most of the time, gold and oil prices move in tandem. When oil increases, gold also does. When oil prices drop, the gold price only drops sometimes.
Status of the SPR
The chart shows the weekly SPR balances since January 2021. The highlighted sections show March 2021, 2022, and 2023. There are 196,743,000, or -34.6%, fewer barrels now than a year ago and 266,197,000, or -41.7% fewer than in March 2021. The reserves are at the lowest level since November 1983.
As a member of the International Energy Agency (IEA), the U.S. is required to maintain a 90-day supply of its daily imports. Currently, the U.S. uses about 20.28 million barrels per day, meaning the current SPR would last less than 19 days.
What does it mean?
The SPR is off most people's radar. It gets mentioned periodically in the news, but most people need to learn about the situation's seriousness. If there were any interruption to Middle Eastern oil flowing into the U.S., in less than three weeks from disruption, the U.S. could face another oil crisis like in the 1970s. Inflation would be astronomical. If history repeats itself, buying gold may be a good idea.
A reminder: past performance does not guarantee future results; nothing in this or any article should be taken as investment advice. The Biden administration failed to buy oil at a low, leading the market prognosticators to predict a higher price this year. Between September 1971 and September 1980, the price of oil climbed from $3.56 to $36 per barrel, an increase of 911.2%. During the same period, gold prices rose from $42.03 to $674.84, a 1,503.61% increase. It is unlikely that oil will touch the $72 mark again for quite a while, if ever. The U.S. will likely have to pay a much higher price or wait long before refilling its SPR.
The Biden administration has released the SPR to lower pump prices to tame inflation. The problem is that the SPR is designed for emergency preparedness. The U.S. is no longer prepared if anything were to happen. No one knows what the future holds. However, seeing how not having strategic petroleum reserves could become an unmitigated disaster isn't tough. The same is true for not keeping a strategic value store outside the Dollar. For most people, the strategic value store of choice is precious metals.
How are your strategic reserves?
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