Oil rally stalls after 4% weekly gain on Keystone closure and SPR repurchase

By Barani Krishnan

Investing.com -- Blame it on the central banks, but oil’s comeback rally after its worst week since March has been snuffed out by renewed fears of recession and higher-for-longer interest rates in the U.S. to Europe — despite this week’s support from the shutdown of Canadian oil pipeline Keystone, which supplies crude to refineries in the United States

U.S. West Texas Intermediate crude for delivery in January settled Friday’s trade down $1.82, or 2.4%, at $74.29 per barrel. Earlier, WTI, as it is known, hit an intraday low of $73.33. For the week, it rose 4% after a 11% drop last week, like Brent. The U.S. crude benchmark fell to as low as  $70.11 a week ago — hitting a bottom not seen since Dec 21, 2021.

U.K. origin Brent crude for delivery in February settled down $2.17, or 2.7%, at $79.04 per barrel. Earlier, Brent hit a session low of $78.30. For the week though, the global crude benchmark was up 4% after the 11% slump in the week prior that took a barrel of Brent to as low as $75.14 — a bottom not seen since Dec 23, 2021. 

Recession fears aside, weighing on oil Friday were fears that China’s coronavirus contagion could get out of hand again amid reports of rising fatalities in the world’s largest oil importer.  “If COVID spreads freely and many people cannot get care, we estimate that in the coming months 1.5 million Chinese people will die from the virus,” The Economist said.

On the positive side, there was just modest support for the market on Friday from news that the Biden administration will start refilling the heavily drawn-down U.S. Strategic Petroleum Reserve, or SPR, from February with an initial purchase of 3M barrels.

The administration has drawn down some 200M barrels from the SPR over the past year, sending inventories in the reserve to 38-year lows, as it attempted to bridge a global supply deficit in crude caused by Russia’s invasion of Ukraine and consequent sanctions on Moscow. 

Reliance on the SPR accelerated after the White House approved a 180M-barrel draw over a six-month period beginning in May. Brent crude hit 14-year highs of almost $140 a barrel in early March, just after the Ukraine invasion, while U.S. pump prices of gasoline hit record highs of $5 per gallon by June.

As of Friday, Brent was trading under $75 per barrel while gasoline at U.S. pumps averaged $3.18 per gallon, according to the American Automobile Association — although some areas in the United States with refineries in their proximity had gasoline at under $3 a gallon due to cheaper costs of transporting the fuel.

News of the SPR’s refilling, which oil bulls had widely anticipated to re-energize oil prices, came amid a renewed hawkish tone by the Federal Reserve, the European Central Bank and the Bank of England that dampened risk appetite across markets.

The stance by the global central banks reignited fears that a recession might be inevitable for the U.S. economy and accelerate the one already happening in Europe.

The positive tone in oil was also offset somewhat on Friday by a Biden administration official saying the SPR would also loan out 2 million barrels to domestic energy companies to relieve any supply shortage caused by the Keystone pipeline’s closure. The 622,000 barrel-per-day Keystone pipeline is a critical artery shipping heavy Canadian crude from Alberta to U.S. refiners in the Midwest and the Gulf Coast. It has been closed for a week now, after causing what officials say is the largest U.S. oil spill in a decade.

Under the SPR loan arrangement reported Friday, companies will immediately receive an x-amount of barrels from the reserve to resolve the supply crunch emanating from the Keystone crisis and return them much later, at a mutually-agreed time.

“It’s a smart hedge, if you ask me,” John Kilduff, a partner at New York energy hedge fund Again Capital, said, referring to the two countervailing decisions involving the SPR. “Instead of announcing a massive purchase that would take care of the entire 180 million barrels that were drawn down the last six months, the administration chose to just begin with a 3 million barrel purchase. The positive impact on the market will be minimal, just as U.S. consumers at the pump would have liked.”