Strong oil demand and low inventories have clashed in an evolving global energy crisis so far this year, with Russia's war in Ukraine worsening the situation and raising uncertainties that could affect U.S and global energy systems for years to come.
As context, we began 2022 with the record-high U.S. petroleum demand of 21.2 million barrels per day (mb/d) in the first quarter of 2022, by API estimates, which was the strongest demand for a first quarter of the year since 1963.
Meanwhile, U.S. commercial crude oil inventories entering 2022 fell to their lowest levels since 2014 and remained near decade lows through April. Regional differences in inventories have also been pronounced, with those at Cushing, Oklahoma, and on the East Coast (PADD 1) having fallen nearly 40-percent below their respective 10-year averages as of April 29, per EIA.
Historically, when commercial crude inventories become low, the U.S. Strategic Petroleum Reserve (SPR) has helped protect against potential supply disruptions. However, as of April 29, the SPR also fell to its lowest level since December 2001, per EIA, due to a release of over 50 million barrels between September and December, followed by an unprecedented release of 1 mb/d over six months, as announced by the White House at the end of March. That could result in an additional drawdown of 180 million barrels, resulting in the lowest SPR levels since 1983.
The Department of Energy announced May 5 that it intends to replenish the SPR beginning this fall, which suggests it expects a production response within a few months, such that purchasing barrels for the SPR would not crowd out those barrels that are needed to meet domestic demand or exports. EIA currently projects annual growth of 1.5 mb/d of U.S. liquids production in 2022.
With the world shifting away from Russian energy production, however, the international pull for exports of U.S. crude oil, refined petroleum products and natural gas has risen. In fact, crude oil and refined product exports rose by more than 40 percent year-to-date through April 29, per EIA. And with the International Energy Agency's (IEA) estimate that the world could lose 3 mb/d of Russian supply in the second quarter of 2022 and OPEC's recent advisement to Europe that the cartel cannot compensate for a loss of Russian crude oil, market uncertainties have escalated.
Policy sets the tone for markets to respond to uncertainties in many arenas, and energy policies matter to natural gas and oil industry investment, drilling and production. Historic market changes seen even prior to Russia's war in Ukraine necessitate bold responses, and the question is whether market and policy instruments are fit-for-purpose with the scale, timeliness and cohesiveness needed to be effective.
Unfortunately, at this point we must consider the body of recent federal policy and legislative proposals that have potentially impacted domestic production. These include limiting resource access and leasing on federal lands and slow permitting for needed pipeline infrastructure, as well as proposals reinstating a ban on U.S. crude oil exports, raising corporate taxes, imposing windfall profit taxes, eliminating natural gas in U.S. power generation over time, and angering OPEC nations with punitive "NOPEC" legislation.
Given this list, it would be hard to say energy policies have been compatible with increasing oil and natural gas production. And historically a combination of demand outpacing production, low inventories and increased imports has been a recipe for upward price pressure. With Russia's war in Ukraine, the U.S. additionally faces recently increased needs to export energy commodities, which makes a U.S. production response even more crucial.
Historically, prices have been likely to be relatively lower when domestic U.S. production has been abundant. For this reason, perhaps now more than ever before, we need cogent policies to support an all-of-the-above approach to energy supplies, so markets can be resilient to geopolitics that matter to U.S. economic and energy security.
For more information, contact Dr. Foreman at ForemanR@api.org or (202) 682-8530.
