Oil as a Weapon

Jim Brown
 
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I think the current administration fails to understand that oil can be used as a weapon. Ronald Reagan used it with great impact on Russia and caused the end of the Soviet Union.

Brent crude prices have declined to $80 and that is the benchmark for crude exports around the world. Every grade of exported oil is indexed to Brent in some form. The price has fallen from $112 in June to $77 last Thursday. That is a -31% drop in price.

To put this in perspective that is a loss of $315 million a day in export revenue for Russia. Instead of receiving $1.008 billion a day they are only getting $693 million. That shortfall would buy a lot of tanks and fighter planes or pay the salaries of a lot of troops on the ground.

Since everyone always spends more than they make, even countries, this means Russia is having to dip into its reserves every day to make up that $315 million. Every day that Putin wakes up he has to account for a new $315 million shortfall. That would ruin the day for almost everyone.

It is obvious that the longer oil prices stay at this level the more damage is done to Putin's aggressive capabilities. Add in the sanctions for the Ukrainian invasion and Russia is in trouble.

Iran is struggling. The low oil prices are restricting their income from the 1.25 mbpd they are currently exporting. If it were not for the low oil prices they would probably not be at the nuclear negotiating table today. They are drowning in debt and rising inflation. It is rumored they will ask for a one million barrel production cut at the OPEC meeting on Thursday. While Iran can't really export more or afford to export less if they can get everyone else to cut production the price will rise and benefit Iran. I would not hold my breath. Nobody likes Iran because they also export terrorism all around the Persian Gulf. Saudi Arabia, the big dog in OPEC, really hates Iran and they would probably agree to keep production high just to cripple Iran.

Venezuela hates America but they sell 1.0 mbpd of oil to the great Satan to the north. Venezuela needs $135 oil to make their budget commitments. They have no hope of seeing that in the near future so they will also be asking for a production cut. Venezuela has not been able to meet their quota in years so any real cut would not impact them. It would help them if the prices were to rise on the news.

Here is my point. If President Obama would switch to an "oil as a weapon" policy he could sink Russia, Iran and Venezuela, all thorns in his side, before his term is over. By opening up Federal lands and offshore areas to exploration it would send a message that more oil is coming. It would take ten years before the first production but the world is going to be an even scarier place ten years from now.

If he would approve the Keystone pipeline he would guarantee the U.S. another 830,000 bpd from a secure source and drive oil prices even lower. It would be 3-5 years before the oil began to flow but perception is the key. Everyone would begin to project that new oil and prices would drift lower.

If the DOE would speed up lease sales it would trigger faster exploration, create more jobs and boost the economy and project more oil production 7-10 years from now.

Analysts claim we need $75 oil to continue to explore at the current rate. That may be true but there is a lot of oil that can be produced for less than $75 and drillers will simply move to those areas.

The key here is that the U.S. still imports more than 7.0 mbpd from other countries, several of which are in the Middle East. With radical Islam on the verge of taking over the Middle East our oil supplies are far from secure. The U.S. is the second most hated country in the world by the radicals. They would like nothing better than to cut off our oil imports and watch our gasoline prices rise.

Why should we let this happen? If we converted to an energy security policy and plowed full speed ahead on all additional exploration opportunities we could eliminate nearly all of our imports in 10 years or less. That would help our balance of payments with us not paying nearly $17 billion a month to people that hate us for the privilege of importing their oil. That same $17 billion a month would be spent on oil in the U.S. that would support millions of jobs and that money would flow back into our economy.

The administration needs to think past the next election and realize that oil is the real nuclear weapon. If we can produce enough oil to keep prices low it not only benefits U.S. consumers with lower gasoline prices but it puts significant economic pressure on our adversaries like Russia, Iran and Venezuela. It could literally end Putin's rule and probably replace Maduro in Venezuela as well. There is a distinct possibility it could fuel social unrest in Iran that would overthrow the current government and end the nuclear arms race.

Oil is a weapon. Use it!

Oil Inventories

Crude inventories rose +2.6 million barrels last week thanks to a surge in imports of 761,000 bpd. That is a huge increase and after two weeks at three month lows on imports it was probably just a catch-up in deliveries. Fog in Houston, storms overseas or any number of events can delay tankers for days or weeks but they all arrive eventually.

Cushing inventories rose to a three month high at 23.3 million barrels. Refinery utilization soared to 91.2% and the highest level for this time of year in several years. Refinery inputs of oil rose to 15.91 mbpd and the highest level in more than two months. Product supplied was 19.7 mbpd and just under the three month high of 20.06 mbpd from three weeks ago. Refiners are running hard and processing this cheap oil while gasoline prices are still high for exports.

Gasoline inventories rose +1 million barrels despite gasoline demand rising +189,000 bpd to a two month high of 9.19 mbpd. This was the second week of gains as refiners continue flooding the system with winter fuel blends.

Distillate inventories declined by -2.1 million barrels. Imports declined -38,00 bpd and demand declined -173,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.


Propane inventories rose +0.10 million barrels to 81.15 million. Demand increased slightly from 1.17 mbpd to 1.34 mbpd. After the cold weather the last two weeks I would expect to see some rising demand numbers in the next couple of weeks.

Natural gas inventories declined -17 Bcf to 3,594 bcf for the first decline for the season. Inventories are still -6.4% below the five year average at 3,838 Bcf. I expect to see withdrawals from inventory next week as well.

Market

The market ended the week at new highs on the major indexes. Thanksgiving week is normally mildly bullish with about a 1% gain. The fundamentals are strengthening but the market is very overbought. Profit taking could occur at any time.

Jim Brown

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