Oil Pares Gains Above $100 Amid Report of Reserves Release
Summary
- Oil prices surged 25% to near $120 per barrel before tapering to just above $100 following reports of a coordinated G7 Strategic Petroleum Reserve (SPR) release.
- The Strait of Hormuz, responsible for 20% of global seaborne oil and fuel products, is effectively shut down due to war involving Iran.
- South and Southeast Asian countries are already experiencing missed oil deliveries.
- Japanese refiners are actively lobbying their government to tap strategic reserves to offset the physical supply shock.
Trade Ideas
G-7 members will be meeting later today or early US morning to discuss a potential joint release of the strategic oil reserves. And then prices kind of tapered a bit. Government interventions via SPR releases artificially suppress prices in the immediate term. This creates a tactical headwind for crude oil, meaning investors should wait for the SPR headline to fully price in before taking long positions based on the underlying Hormuz closure. The SPR dump will likely create a buy-the-dip opportunity. WATCH USO for a tactical entry point once the SPR release volume is officially announced and absorbed by the market. The SPR release could be significantly larger than anticipated, or sustained $100+ prices could trigger severe macroeconomic demand destruction, capping the upside for crude.
There are some countries that aren't getting the deliveries that they need, especially in South and Southeast Asia... Japanese refiners were pushing their government to try to go forward with tapping some of their reserves. Asian and European refiners rely heavily on Middle Eastern crude imports. With Hormuz shut, these foreign refiners face severe feedstock shortages and will have to cut utilization rates. US refiners, however, have access to abundant domestic crude (WTI). As global refined product supply drops due to foreign refiner curtailments, crack spreads (refining margins) will explode higher, disproportionately benefiting US refiners. LONG US refiners as they capture record margins driven by global product shortages and secure domestic feedstock. A global recession triggered by the energy shock could destroy consumer demand for gasoline and diesel, compressing refining margins despite the supply constraints.
The idea that the Strait of Hormuz, which is a vital waterway for 20% of seaborne oil and fuel products, and that's going to remain shut and that's going to cause a strain on the markets, prices and consumers. A coordinated SPR release is a temporary band-aid that cannot replace 20% of global seaborne supply over the long run. If Hormuz remains closed, global supply remains structurally impaired. US-based energy producers are geographically insulated from the conflict and will reap massive windfall profits from sustained $100+ crude prices without facing the physical delivery risks of Middle Eastern producers. LONG US energy majors to capitalize on structurally higher oil prices and a lack of domestic supply disruption. A sudden diplomatic resolution to the Middle East conflict reopening the Strait of Hormuz would cause a rapid collapse in oil prices back toward the $70 level.
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