Potential SPR release only highlights the tightness in global inventories — three charts

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US President Biden will make a speech about energy today and there are various reports saying he will announce a 1 million barrel per day drawdown in the US strategic petroleum reserve for six months; or a total of 180 million barrels.

The US has been selling 500k bpd already so this is presumably on top of that. There are reports that they’ve lobbied OPEC+ to do more but that hasn’t gotten any traction. Today’s 12-minute long OPEC+ meeting is a strong message that they’re not thinking about adding oil beyond what’s planned.

We don’t know details of the plan yet. Previously the US had executed calendar trades where they sell oil now and buy it back in the futures. Because of the backwardated futures curve, they will actually make money on it. But while that means oil supply will be driven down now, it means more buying later.

Here’s a look at the SPR, where inventories are already drawing down rapidly.

It’s not just the SPR that’s drawing down. Here is a look at US inventories excluding the SPR from Scotia:

If anything, that picture understates the size of the problem because distillate inventories are also very low. Gasoline inventories are in line with the 5-year average but driving miles have picked up rapidly and I’m expecting a blockbuster summer of travel. On top of that, Canadian oil producers have some large maintenance turnarounds scheduled for Q2.

Globally, here is the picture from CIBC:

I still don’t see any signs of a big supply response anywhere. North American drillers can’t source steel or labour. I wrote last month about a contract driller who said it took them six months to add a single crew.

In terms of bigger projects, there has been no movement on offshore or anything outside of Guyana, which has long been in the pipeline. Moreover, investors punish any companies that announce large-scale capex because the stocks remain so cheap against the oil strip.

Ultimately, I think the only way out of this is when oil companies re-rate to something like 8x EV/EBITDA from sub 4x currently. Then buying back shares starts to become less attractive that new capex.

The larger fear is that OPEC+’s spare capacity is less than touted and/or that sanctions materially remove Russia oil. Combine that with the US tank running dry and it’s a recipe for a super-spike in oil.

Even now the market is beginning to shrug off the US SPR talk with WTI up to $103.81 from a low of $100.17.