The Administration Surprises the Market with a Larger Than Expected Drawdown of the Strategic Petroleum Reserve, Driving Crude Oil prices UP

Markets cannot be fooled but they always prove politicians to be fools.

I reported last week that the Biden Administration signaled its plans to release crude oil from the Strategic Petroleum Reserve before the July 4 holiday to drive down gasoline prices for the holiday and beyond. The Administration claims it is doing everything possible to lower gasoline prices and believes voters are dumb enough to fall for its empty rhetoric. At the same time, it carries out its campaign pledge to eliminate fossil fuels.

The Administration made good on its promise to drain the SPR further and sold off an unexpectedly large amount of crude oil in the last week of June, which surprised the market. As reported by OilPrice.com:

The American Petroleum Institute (API) reported a significant 9.163 million barrel drawdown in U.S. crude inventories for the week ending June 28. This far exceeded analysts' expectations of a 700,000-barrel draw, providing strong support for oil prices (emphasis added).

The unprecedented drawdown of the SPR before the 2022 midterm elections had already reduced it to 1983 levels. This recent decline in the SPR came on top of a steep decline in U.S. commercial crude oil inventories, which had already decreased by 12.2 million barrels from the previous week.

The Administration thought that more releases from the SPR would drive down gasoline prices and fool voters, but the market pushed Brent crude prices up to $86.84 per barrel on June 4, 2024, and WTI trading at $84.16 per barrel, reflecting a 15% increase this year. According to a July 4, 2024 article on OilPrice.com:

Light crude oil futures have climbed 2.12% this week, driven by a mix of bullish factors. Geopolitical tensions in the Middle East, an unexpectedly large draw in U.S. crude inventories, and optimistic forecasts for summer fuel demand have all contributed to pushing prices higher. As traders assess these developments against the backdrop of OPEC+ supply management and steady U.S. production growth, the oil market remains finely balanced between supply constraints and recovering demand.

What markets know that the Administration does not know is that the purpose of the SPR is to provide supply stability when crude supplies are disrupted due to geopolitical and weather events. Unfortunately, potential disruptions of crude oil supplies currently abound: a major hurricane is headed to Mexico after damaging many Caribbean islands, the Middle East is a hotbed of tension in Israel, Gaza, and Lebanon, and Houthi attacks are continuing to disrupt shipping in the Red Sea.

My take: The recent drawdown of SPR crude reserves was wrong, with this Administration continuing its record of historically bad decisions. This blatantly political gambit drives up crude oil prices, with higher gasoline prices to follow, and weakens U.S. security.

With this Administration already collapsing due to its political misconduct, the decision to further weaken the U.S. by releasing more crude oil from the SPR will embolden bad actors worldwide. OPEC may decide to cut its crude production even more, and China may shorten its timeline to invade Tawain. Anything can happen at this point.

U.S. energy policy must change and change fast. The U.S. needs more fossil fuels, not less, and its SPR needs to be refilled as soon as possible.

November 5 cannot get here soon enough.

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