How To Play The White House’s New Oil Price Floor

oil prices

To help hold down fuel and energy prices, the Biden administration has been selling oil out of the Strategic Petroleum Reserve (SPR), to the tune of three million barrels per week since the start of the year.

Now, with the SPR at its lowest level since the 1980s, the administration’s plan to refill the reserve will prop up profits in the energy patch.

That’s creating some nice profit opportunities…

After selling 180 million barrels out of the SPR to keep oil prices down, that tactic has run its course. After peaking at about $125 in early summer, WTI crude now trades for around $85. It’s impossible to say whether the SPR releases helped bring down the price, or whether fear of a global recession and the China COVID lockdowns had the bigger effect.

However, with oil at $85, gasoline remains expensive. Diesel fuel is also costly, with very little supply to fall back on if there is a disruption in the energy supply chain.

The Biden administration recently shifted gears, releasing a press statement with its plan to refill the SPR. Here is an excerpt:

…the President is announcing that the Administration intends to repurchase crude oil for the SPR when prices are at or below about $67-$72 per barrel, adding to global demand when prices are around that range. As part of its commitment to ensure replenishment of the SPR, the DOE is finalizing a rule that will allow it to enter fixed price contracts through a competitive bid process for product delivered at a future date. This repurchase approach will protect taxpayers and help create certainty around future demand for crude oil. That will encourage firms to invest in production right now, helping to improve U.S. energy security and bring down energy prices that have been driven up by Putin’s war in Ukraine.

There is a lot here to parse. First is the assumption that crude oil will drop to the $70 range. But when the administration stops selling out of the SPR, it’s likely to push oil higher, not lower. The plan for a “competitive bid process for product delivered at a future date” seems complicated. The plan appears to encourage production by offering less than current market prices.

Instead, the plan puts a floor on the price of oil. Upstream energy producers are very profitable if they get $70 per barrel. I suspect energy traders will use information from the Biden administration’s announcement to keep the price of oil well above $72. I doubt this move will spur energy companies to ramp up production. They want to see more long-term support, which means more drilling permits and fewer regulatory hassles.

All of this means that oil and gas energy producers will remain very profitable. Energy has been the only profitable stock market sector this year, and it will not give up that lead. To invest in energy, you can go with mega-cap companies like Exxon Mobil Corp. (XOM) and Chevron Corporation (CVX). If you want to go with companies with more leverage to higher energy commodity prices, here are the top 15 holdings of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

PSX, VLO, and MPC are refining companies. The rest are primarily upstream producers and will continue to profit from high energy prices.

This post originally appeared at Investors Alley.