Let my oil flow - InvestingChannel

July 26, 2024

Let my oil flow

by InvestingChannel0197

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What drives gas prices?

When gas prices rise, many are quick to blame the current administration.

But that’s just not how things work.

The only thing the government can do to influence gas prices short term is release the strategic petroleum reserve (which is what our main story is about).

Moratoriums on land development and pipeline approvals don’t have much if any bearing on current prices.

Those take years to come into service.

Plus many companies plan for administration changes and just buy more land ahead of the turn.

To give you an idea of the marginal impact of any one project, consider the following:

  • There are 2.6 million miles of oil pipelines in the US.
  • We consume around 20.54 million barrels of oil per day in the US (18.19 million barrels per day in 2020).
  • We imported 7.86 million barrels of oil per day in 2020.
  • We produce around 12 million barrels of oil per day.

Plus, once oil is drilled, it needs to go to a refinery to be turned into gasoline before its transport to your location station.

So what drives gas prices?

Our consumption. 

Supply is pretty constant. But demand can swing around quite a bit.

Energy

Let my oil flow

Key Takeaways

  • The US is releasing 50 million of its 604.5 million oil reserves in a coordinated effort with other major countries including China.
  • This historic collaboration puts the oil consumers at odds with OPEC+ producers.
  • Don’t expect gas prices to decline until sometime in February next year.

World leaders may not drive often. But they know people hate high gas prices.

So open the floodgates and let the oil flow.

Release the Kraken

A coordinated effort between the US, Japan, India, China, South Korea, and the U.K. aims to crack high oil prices.

  • The US will release 50 million barrels, 32 million of which will be exchanged and 18 million will be an acceleration of the previously authorized sale.
  • In total, the US Strategic Petroleum Reserve (SPR) holds 604.5 million barrels at four different sites and maxes at 727 million barrels.
  • It takes 13 days after the announcement for oil to hit the market.

We’re not gonna take it

Never have the countries listed above ever worked together on something like this.

They effectively told OPEC+ to take their model and shove it.

The Organization of the Petroleum Exporting Countries (OPEC) and a few other members such as Russia refused to increase supply even as shortages plagued Europe and the West.

China’s cutback on energy production hasn’t helped either.

However, demand remains incredibly high. And OPEC+ doesn’t plan to increase supply until January.

In fact, OPEC+ warned they would cancel plan supply boosts if the reserves were released.

Not everyone is thrilled

Business groups and Republican lawmakers didn’t agree with the release.

They argued the reserve should only be tapped for true supply disruptions. Instead, they want the administration to focus on increasing domestic production.

However, the Energy Department is already obligated by law to sell 260 million barrels by 2027.

Analysts said the actual impact of the release is minimal on commodity prices. What matters more is the posturing and collaboration between some pretty different countries.

The bottom line: Don’t expect gas prices to come down quickly. Once we get past the US holiday season and then the Chinese New Year, we should start to see some relief.

However, in the long-term, oil and gas exploration companies will increase production in the US to make us less reliant on foreign supplies.

That bodes well for ETFs like the XOP.

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