As of July 2020, Kemp noted, US oil reserves have fallen by 421 million barrels. Strategic oil stocks are also low and fuel stocks are below average for this time of year, especially in spirits, which are 30 million barrels below average.
From an immediate perspective, the fact that the US is intervening to fill the gap left by Russian oil has been good news for both US exporters and European importers. In the long run, however, the plan could hit an inventory wall.
If US exporters are sinking in their reserves to send enough oil to Europe, that means US oil production is not growing fast enough – a fact that the Biden government has been mourning for some time.
Higher inventories coming from stocks could become another issue the government finds problematic, especially in the wake of a proposed oil export ban by congressmen to keep fuel retail prices in check before the Russian invasion. in Ukraine. Now, pump prices are even higher than they were in December when lawmakers proposed the ban.
Clearly, a ban now would run counter to the government’s repeatedly stated and proven support for Europe’s energy needs. However, the relationship between rising US oil exports and rising domestic fuel prices is difficult to ignore. The key, of course, is to ensure that production meets demand, which will be even more difficult.
The latest monthly production data from the Energy Intelligence Agency (EIA) revealed that US oil production fell in February, before Russia started its war in Ukraine. Since then, production may have increased to some extent, but not everywhere.
The Wall Street Journal reported last week that oil rigs in Permian, the nation’s largest contributor to increased production, are battling persistent shortages of equipment, workers and, perhaps paradoxically, cash.
Citing energy executives and analysts, WSJ Colin Eaton said that while Permian was expected to be the only place in the US where oil production could increase significantly, this growth may not materialize as expected due to ongoing supply chain involvement. .
One reason, according to Eaton, is the damage suffered by the oil services industry during the pandemic, which prompted companies to devour a lot of equipment that is now apparently slow to return to the internet.
Another reason, according to the WSJ, is the continued skepticism among investors about the oil industry, despite the price rally. This effectively cuts off the wings of oil service providers who do not have enough cash to invest in more equipment in response to higher demand for it.
The situation could prove problematic for both the US and Europe. The chances of large public oil companies suddenly changing their minds and doing what politicians want – to stop buying stocks, suspend dividends and boost output – are slim to non-existent.
The chances of smaller independent producers suddenly finding the money to drill enough to balance international oil markets may be slightly higher, but still very small: investors need time to change course and then it takes time. to start growing.
According to the EIA, US oil production will increase by about 8% this year from last year, to 12.6 million bpd. This will increase from the 11.9 million bpd estimated to be in the week to April 22, so the increase will be less than 1 million bpd. Europe needs more than that and there are few producers as friendly as the USA. However, the US will also need to be slower, even to replenish its reserves at some point.
The situation is likely to remain complicated for some time. It is no coincidence that Finance Minister Janet Yellen warned the European Union last month to be cautious when it came to an oil embargo on Russia, as it would raise prices for everyone. Despite the warning, the EU is continuing the embargo plan, which could only be announced this week.
By Irina Slav for Oilprice.com
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