Stocks fell slightly this morning as the late-March “melt-up” slowed. The Dow, S&P, and Nasdaq Composite all traded modestly lower as oil slid, too, despite news out of Russia concerning oil exports.
Earlier today, Russian President Vladimir Putin signed a decree stating that all “hostile nations” would need to pay for Russian oil in rubles. The Kremlin hinted at this over the last week, but the West ultimately dismissed these claims as idle threats intended to roil energy markets.
Now, however, EU leaders are scrambling to find alternative solutions following Putin’s decree.
That includes German Chancellor Olaf Scholz, who insisted that German companies “can, want, and will” pay for oil in euros. If that’s the case, these companies will be forced to buy oil amid a significantly reduced supply, as Russia is by far Europe’s largest provider of oil and gas. This should only push Brent crude prices – the European benchmark for oil – higher in the coming weeks.
Today, oil retreated thanks to a release from the US Strategic Petroleum Reserve (SPR) to the tune of 1 million barrels per day.
“The scale of this release is unprecedented: the world has never had a release of oil reserves at this 1 million per day rate for this length of time,” the Biden administration said in a release.
“This record release will provide a historic amount of supply to serve as a bridge until the end of the year when domestic production ramps up.”
But the moderate-term trend should shift upward again when EU members begin rationing gas – something that Germany warned could happen soon as a result of Russia’s new demands.
And while the planned SPR release will flood the US market with oil, it will also cause US oil reserves to drop to a 40-year low in the coming months.
“It is hard to overstate the scale of this intervention if it bears out,” said Kevin Book, managing director of ClearView Energy Partners.
“It would be the largest draw-down volume announced in the 45-year history of the SPR by a factor of 3.6x.”
OPEC+ has also refused to increase oil production moving forward, which should make refilling the SPR a difficult process. The current structural supply deficit won’t be fixed by the SPR release, either. In fact, it may only get worse as restocking the SPR could cause oil prices to rise.
“[An SPR release] would reduce the amount of necessary price-induced demand destruction,” wrote Goldman analyst Damien Courvalin in a note.
“This would remain, however, a release of oil inventories, not a persistent source of supply for coming years.”
Trafigura Chief Economist Saad Rahim piled on, adding that the SPR release will actually discourage future oil output while driving prices higher. Worse yet, Rahim said that the US is only able to deliver roughly 400,000 to 500,000 barrels of oil per day from the SPR.
Infrastructure upgrades are likely necessary if the US is going to deliver 1 million barrels per day.
That may be the White House’s long-term plan as Biden attempts to rationalize his latest federal budget (revealed two days ago), which includes billions in spending for infrastructure.
Overall, though, West Texas Intermediate (WTI) crude – the US benchmark for oil – barely ticked lower today despite the unprecedented SPR release. Gas prices remained virtually unchanged in the US as a result.
If that’s as far as oil is going to fall in response to the newly announced SPR draw, a massive oil runup could be on its way in April and May. Today’s slight drop may be clearing out “weak-handed” oil bulls ahead of the next push to new highs.
That’s a big problem for the West, where Russia’s new oil policy is about to wreak even more havoc on the global economy.
And at a time when stocks are stalling across the board
