The Collapse Of Silicon Valley Bank Led To Biden's Losing Oil Bet‍

The announcement last fall that the White House would replenish the Strategic Petroleum Reserve at a specific price raised some unease that Uncle Sam might start playing in commodity world’s largest gambling game. It's a mistake to look at this issue in this way. But the administration's erratic behavior since then suggests that President Joe Biden may have really acquired a taste for gambling as well.

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During a recent meeting with lawmakers, Energy Secretary Jennifer Granholm said it would be “difficult” for the SPR to be replenished this year due to the ongoing Congressionally mandated sales from the reserve and the maintenance at two storage facilities. It would have been barely newsworthy at any other time, but the administration has made the situation so by its actions.

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A few months ago, Biden proposed a rule to the government to buy barrels to refill the SPR when prices were “at or below about $67-$72 per barrel” following a massive drawdown in the SPR as a result of Russian aggression in Ukraine. By doing this, US oil producers would theoretically be able to secure a free hedge against the economic downturn, and would be encouraged to start drilling. As a result, the SPR will become an economic buffer stock, releasing barrels when oil prices are uncomfortably high and buying them when oil prices drop low enough for consumers to discourage production. This would be a very useful way for the US to repurpose an important piece of public infrastructure since the US has shifted from being a huge net importer to a net exporter of oil over the past few decades.

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Biden, who isn't exactly enamored with the oil industry anyway, was sceptical, and he has been accommodating to them. Biden's energy security adviser, Amos Hochstein, attached a condition within six weeks, telling Congress that in order for repurchases to begin, oil had to be priced in the mooted range “on a consistent basis”. As soon as he appeared on television earlier this month, he reiterated that the administration would not necessarily move quickly. Granholm agreed with him to Congress. He's doing a great job of trashing producers' trust if he wants to build trust with them, and he's doing a great job of doing that.

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A majority of the 180 million barrels released by the SPR have already been “refilled” by canceling future sales mandated by Congress earlier this year, indicating that the SPR was going to shrink anyway, because nearly three-quarters of those barrels had already been refilled already. Consequently, there are still 40 million barrels remaining in the system, and as the last sales are completed, the gap will increase to over 60 million barrels by this year.

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Due to the ongoing fallout of Silicon Valley Bank's collapse, the timing of the latest comments is particularly interesting. In the past few months, oil futures, especially in 2024, have been dipping into Biden's refill range fairly frequently, but when SVB failed, the entire curve swooned into it.

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A bank failure, fear of contagion, and a panic to get out of risk assets made the story here not so complicated. In order to escape from oil-price bets at such a pace that would be commendable to SVB's depositors, money managers stampeded out of the market. During the two weeks leading up to March 21, according to Rory Johnston, who writes the Commodity Context newsletter, speculative open interest in crude contracts fell by the fastest rate on record during the two weeks preceding March 21. There was a significant collapse in the rate of net speculative length since March 2020, a period that was somewhat unnerving for the oil market, as well as humanity in general.

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Essentially, this was the kind of time when the streets were filled with blood and a lot of buyers swooped in with cash in their hands. In other words, an Energy Department nominally seeking to replenish the SPR and signal support for domestic oil producers would be a good example. However, there is also an added twist here, as other elements of the administration have been working hard on calming down the banking panic at the same time. Assuming Biden believes that these efforts will work, he will be able to take advantage of the downturn in oil prices, knowing that soon prices will stabilize again. Moreover, the news that SVB finally found a buyer on Monday boosted the market in general, with oil rising over $3 a barrel, although swaps for 2024 are still within the purported buying range, despite the news of the SVB finding a buyer.

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As a matter of fact, Biden's energy policy is indeed a high-wire act, balancing green objectives with energy security demands in the present. In the same way that he recently approved the Willow oil project in Alaska, the president will receive criticism within his own party for any policy that is seen as sympathetic to fossil fuels.

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It is, however, an obvious green political choice to use the SPR in order to modulate the market. It is apparent from Biden’s response to the $5 pump price last year that he is aware that by allowing oil supply to fall behind demand, a good way is to lose power before the transition to a more sustainable energy system can take place. In the end, a put works only when a party is credible in extending the put. Therefore, we should make a show of the new approach to the SPR. I think Biden is increasingly taking the stance that if oil remains quiet until after the next election, then he is playing a straight bet. What is possible to go wrong with this bet?