The U.S. is nearing the end of its previously announced release of 180 million barrels (bbls) of oil from the strategic petroleum reserve (SPR). At the time of the release, the announced strategy revolved around the idea that this would increase supply, reduce oil prices, thereby moderating gasoline prices, and reduce pressure on U.S. consumers. This, along with other international actions, did, in fact, result in lower prices at the pump.
What now? As the announced withdrawals end, total oil supply will decline by 1.0 million bbls per day, not an insignificant amount. Moreover, what happens when the government decides to start to replenish the SPR?
Investors should consider that commodity prices tend to reflect anticipated changes in the relationship between supply and demand. Oil is no exception. For example, as war in Ukraine erupted, the price of oil spiked, reflecting concerns over supplies from Russia. Prices subsequently subsided as it became clear that Russia still had a market for its oil and the overall impact on worldwide oil supply would be substantially unchanged.
Other events, including weakening world economies and OPEC’s moves to increase or reduce output, tend to temporarily affect oil prices, until market forces work to bring supply and demand back into balance.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA