“Disinflation” honeymoon was nice, thank you, but it’s over.
By Wolf Richter for WOLF STREET.
The price of crude-oil grade WTI rose to $87.12 per barrel this morning, the highest all year, the highest since November 2022. From June, when WTI was $69 a barrel, the price has now jumped by 28%.
The jump today came after Saudi Arabia (from which the US buys little crude oil) said it would extend its July production cuts through December, as widely expected; and after Russia (from which the US, even before the bans, imported only minuscule amounts of crude oil and petroleum products) said that it would extend its output reduction through the end of the year.
And the US has started to refill its Strategic Petroleum Reserve (SPR), which had been drained by half to force down the price of crude oil during the spike. But stocks have now increased for the fourth week in a row. The increases have been tiny, but it’s all working together.
The SPR weighs in both directions.
June 2023 had marked the end of the oil-price plunge from the peaks in March and June 2022. June was also when the SPR stopped being drained.
Fracking has made the US a huge producer of petroleum and petroleum products, to the point that it was decided a few years ago, that the SPR was no longer as critical to the US energy stability, as it had been in the 1980s, when the US was massively dependent on imported crude oil, particularly from OPEC.
So starting in 2017, under the Trump administration, the SPR was being drained in small increments. By March 2020, it had dropped by 8.5% from the levels in the years 2012 through 2016, to 636 million barrels.
Then as oil prices began to spike in 2021, the Biden administration began selling stocks in the SPR. Those sales reached massive weekly quantities in 2022, eventually bringing stocks down by 50% from the 2012-2016 levels, or by 45% from the March 2020 level, to 346.8 million barrels. At the end of June, it halted the drawdown.
In August, it began adding to the SPR but in tiny increments. Over those four weeks, it added 2.8 million barrels, one-tenth of the four-week pace during the peak of the drawdown in 2022. The refilling is so small that it is barely visible on the long-term chart. The insert shows those increases:
The US, a huge producer, is a net exporter of crude oil and petroleum products.
The US oil trade is big and complex. The US became a net exporter of crude oil and petroleum products for the first time on an annual basis in 2020, when it exported more than it imported. In 2022, that position solidified.
Refineries, including those in the San Francisco Bay Area, in addition to refining domestic crude oil, import crude oil, refine it, and export gasoline, jet fuel, diesel, and other petroleum products. It’s a huge industry and a huge trade, and the US, having transitioned over the years from being a huge net importer to net exporter, has changed the global equation.
The chart shows imports of crude oil and petroleum products (purple) and exports of crude oil and petroleum products (red). It also shows the portion of imports that come from Russia (green) and Saudi Arabia (yellow):
The US being a huge producer of crude oil and petroleum products, and a net exporter, has a vast oil and gas industry, and manufacturing and tech sectors to support it. So part of the country and part of the economy benefit from higher oil prices, including people who work in the sector and in supporting sectors. Investors in that sector love higher oil prices that turn frackers profitable.
But higher oil prices drive up gasoline prices and transportation costs and other costs, and therefore indirectly drive up consumer price inflation, and consumers don’t like that at all, but seem to have gotten used to it. The “disinflation” honeymoon was nice, thank you, but it’s over.
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