The action of oil and oil stocks has been easy to parse in the last week – oil prices have moderated based upon the jawboning of the Biden administration on what they might do to mitigate higher oil and gasoline prices that have been generated in the last few months.
And for me as an oil and oil stocks trader, there is an equally fairly easy reaction I have to it all – but let me save that for the end of this letter, as opposed to the beginning.
First, a little history:
Oil has been a political football since the OPEC embargo of 1973. Through Republican and Democratic administrations alike, the methods for dealing with supply and price issues has changed over the years, but one thing has remained constant – Presidents hate oil price spikes.
More than that, they fear them. Whether or not the political history holds true on this or not (there’s evidence it doesn’t), all US Presidents are frightened that high energy prices are a political nightmare that’s impossible to overcome. With an election almost always on the horizon, that makes any kind of oil price spike an emergency political issue for most all modern American Presidents, and they find varied ways to respond to these spikes. To give three recent examples, George Bush (Jr.) made two personal trips to Riyadh during the price spikes of 2008, Bill Clinton released oil from the SPR during the Presidential election campaign of Vice President Gore and Donald Trump sent Mike Pompeo to Saudi Arabia, ostensibly to inquire about the Jamal Khashoggi killing, but resulting in a release of added oil from OPEC right before the 2018 midterms.
Joe Biden is no different. It’s been clear from his statements and preliminary actions that he is taking the spike in oil prices as seriously as any previous President and is determined to do what he can to mitigate them. He first went to the COP26 conference and spoke disparagingly about OPEC, while several cabinet members implied manipulation inside the cartel (BTW, that’s what cartels do). Then, he tried talking directly to the Russians. These first efforts didn’t bring much, so Biden has stepped up his efforts, threatening unspecific “retribution” for the Saudis and OPEC and a coordinated SPR release with other allied nations’ reserves.
And, because of these efforts, oil has in fact retreated from it’s highs of $85 to now nearer to $77.
But what has actually been done? What part of the fundamental picture in oil has changed? Nothing.
A better argument for oil’s recent declines might be the recent surges of cases in Germany and Russia, than the fundamental supply and demand picture of oil. And I’m not one to minimize those outbreaks, but even with the newer Delta variant being talked about, the surges in Covid-19 are almost entirely restricted to the non-vaccinated, a number that continues to drop because of mandates.
Jawboning oil prices is certainly an American political tradition, but it’s not been a very effective long-term policy – and likely won’t be this time. Even a real coordinated release from the SPR will have limited long-term effect on oil prices for the simple reason that the SPR doesn’t represent a significant amount of oil to the global supply balance. Add to that the possibility of coordinated production restraint from OPEC+ in response, something that CAN have a long-lasting effect on oil prices and you’ve got a very difficult spot for the President to be in.
The bottom line is that talking about what you can do to lower oil prices is a heckuva lot more effective than actually doing anything.
For now, Biden is seeing some success with the talk. But that’s going to prove, in my view, to be very fleeting indeed.
This is a moment to be buying oil stocks – this dip in prices is almost certainly an opportunity.
Happy Thanksgiving!
