Nearby NYMEX WTI crude oil futures fell 5.72% in Q1 2023, with the ICE Brent futures declining 6.91%. WTI and Brent are the benchmarks for the traditional energy commodity that powers the world.
After reaching over $130 per barrel in March 2022 for the first time since 2008, crude oil futures have made lower highs and lower lows, declining to bottoms in March 2023. The NYMEX WTI futures reached a low of $64.12, and the Brent futures fell to $70.12 per barrel. On Sunday, April 2, while the worldwide oil futures markets were not operating, OPEC+ announced a surprise over one million barrel per day production cut. When the futures markets opened, WTI and Brent futures gapped higher to over the $80 per barrel level.
In 2022, the U.S. administration facing the highest oil prices in fourteen years, sold an unprecedented amount of petroleum from the U.S. Strategic Petroleum Reserves. As of April 7, the U.S. SPR was 369.6 million barrels, the lowest level since November 1983. With oil prices rising again, the administration has fewer options to suppress prices after selling over 200 million barrels. Meanwhile, natural gas, another critical traditional energy commodity, rose to over $10 per MMBtu in August 2022, the highest price since 2008. Since then, the price has plunged to below $2 in March 2023 and was sitting near the $2 level on Friday, April 14.
Crude oil prices have taken off on the upside, and the volatile natural gas futures market could follow over the coming months.
The U.S. ceded oil’s pricing power to a cartel, and Russia
- S. daily petroleum production rose to a record 13.2 million barrels per day in late 2019 and early 2020.
- As of April 7, 2023, U.S. output stood at 12.3 mbpd.
- The Biden administration supports alternative and renewable energy, inhibiting traditional fossil fuels to address climate change.
- Crude oil and fossil fuels continue to power the world.
- OPEC and its most influential cooperating non-member, Russia, have become the dominant force for global oil pricing.
SPR sales and a missed opportunity
- Russia’s invasion of Ukraine caused WTI and Brent crude oil prices, the worldwide benchmarks, to soar to over $130 per barrel in March 2022.
- The Biden Administration authorized the sale of an unprecedented amount of crude oil from the U.S. Strategic Petroleum Reserve in 2022.
- The U.S. SPR fell to 369.6 million barrels as of April 7, 2023, the lowest level since November 1983.
- In October 2022, the Biden administration had told markets it would buy the replace the sales, made at an average of $96 per barrel, when “prices are at or below about $67 to $72 per barrel, adding to global demand when prices are around that range.”
- In March, NYMEX crude oil fell to $64.12 per barrel, and Brent futures reached a $70.12 low.
- The administration did not purchase any crude oil during the selloff, and the data from March and April showed the SPR inventory declined during March’s final week.
- Q1 is typically a weak price period as gasoline demand is seasonally low.
Seasonality as OPEC+ tightens the screws
- On April 2, 2023, OPEC+ announced a surprise production cut of more than one million barrels per day.
- WTI and Brent futures gapped higher to over $80 per barrel, reversing the bearish trend that had been in place since the March 2022 high.
- The U.S. gasoline market is entering the 2023 peak driving season, where fuel demand increases.
- Without any buying for the SPR when crude oil fell to the administration’s target range, the U.S. has far fewer barrels to combat rising petroleum prices over the coming weeks and months.
- OPEC+ has tightened the economic screws on the U.S. as rising oil and fuel prices increase inflationary pressures.
Traditional energy offers upside- The U.S. administration should have followed Warren Buffett
- Crude oil and oil product prices have moved higher from the March lows and since the end of Q1 2023.
- The XLE closed Q1 at $82.83 after reaching a $75.36 low in March 2023. At nearly $87 per share on April 14, XLE was around 15.5% higher than the March low and 5% higher in Q2.
- Warren Buffett bought OXY shares during the selloff in the crude oil and related shares. Berkshire Hathaway added to its “already large Occidental Petroleum stake,” adding 5.8 million shares at prices from $59.85 to $61.90 in early March. OXY shares were higher at over $64 on April 14.
- The Biden administration missed an opportunity when crude oil fell below $70 per barrel, but value investor Warren Buffett was not asleep at the wheel.
Energy is a supply-side issue that can stoke inflation that is beyond the central banks’ reach
- Rising traditional energy prices are a supply-side economic issue beyond the reach of the Fed’s monetary policy path.
- Rising oil prices increase costs for most businesses and individuals.
- CPI and PPI will likely increase with crude oil and oil product prices.
- After the recent bank failures, the central bank may need to curb its enthusiasm for rate hikes.
- Elevated CPI and PPI means inflation is above the Fed Funds rate, keeping real interest rates in negative territory.
- The trend in petroleum and oil-related companies has turned bullish, and value investor Warren Buffett is on board for the ride. Meanwhile, the administration will lament missing an opportunity that could have tragic economic consequences.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!