Goldman Sachs Warns Low U.S. Emergency Oil Reserves Could Drive Up Oil Prices

The United States is grappling with historically low levels in its Strategic Petroleum Reserve (SPR), posing a challenge to its ability to counteract Saudi Arabia’s aggressive oil supply cuts. Goldman Sachs anticipates that these dwindling reserves could keep oil prices high, averaging $100 per barrel in the near future. Such high oil prices would exacerbate inflation and potentially impact the 2024 presidential race.

To mitigate the effects of the Ukraine conflict, the Biden administration has tapped into the SPR, releasing substantial oil volumes from its Gulf Coast storage tanks. While this strategy initially helped stabilize gasoline prices after reaching $5.02 per gallon in June 2022, it has substantially depleted the SPR. The reserve now sits at its lowest level since August 1983, making it a concern for both Wall Street investors and OPEC.

Goldman Sachs highlights that the reduced SPR levels raise the bar for releasing additional barrels in response to energy price shocks or supply disruptions. High oil prices have even forced the Energy Department to abandon plans to replenish the SPR due to costliness.

Despite these concerns, U.S. officials maintain that the SPR remains the largest emergency oil reserve globally, sufficient to address emergencies in the coming years.

The recent surge in energy prices is primarily attributed to OPEC’s actions, notably Saudi Arabia’s decision to extend supply cuts in a strong demand environment. Saudi output has dropped by 2 million barrels per day over the past year, contributing to rising oil and gasoline prices.

Saudi Arabia has a vested interest in maintaining high oil prices to support its budget and fund various projects, including a potential share sale of Saudi Aramco. Russia is similarly withholding supply to boost revenue for its military efforts.

Bank of America predicts a significant reduction in global oil stockpiles due to these supply cuts, leading to higher oil prices, with an average of $91 per barrel in the second half of the year.

While some in the oil industry warn of oil prices spiking to $120 to $150 per barrel, analysts believe this scenario is unlikely due to multiple market mechanisms that should prevent extreme price levels. One key factor is the flexibility of U.S. shale production, which would respond to higher prices by increasing output. Additionally, Saudi Arabia recognizes the risks of excessively high prices, as they could reduce demand for its oil and accelerate the transition to clean energy.

In summary, the U.S. faces challenges due to its shrinking SPR, which may contribute to sustained high oil prices, but extreme price levels are considered improbable, with various market factors and Saudi Arabia’s self-interest likely preventing such a scenario.

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