Tag: Strategic Petroleum Reserve (SPR)

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War, Inflation & Gold to the Moon

Key Points

  • The war in the Persian Gulf is hotting up, with both sides trading missile strikes and threatening to blockade shipping.
  • Brent Crude rose to $85.40 per barrel.
  • Crude and finished product inventories are declining, increasing upward pressure on gasoline and diesel prices.
  • Interest rates are rising in expectation of higher inflation.
  • The Dollar is rising in expectation of higher rates.
  • Gold and commodities face increased selling pressure as the Dollar strengthens.

DUBAI/WASHINGTON/CAIRO, July 13 (Reuters) – The U.S. military carried out a third consecutive night of strikes against Iran on Monday and two tankers came under ​fire in the Strait of Hormuz, after President Donald Trump said the United States was reinstating its blockade of Iranian shipping in the Gulf and would ensure that the strategic waterway stayed open — for a fee.

….Soon after, the United Arab Emirates Ministry of Defense said Iranian cruise missiles struck two Emirati oil tankers, the Mombasa and Al Bahiyah, while transiting the southern lane of the strait in Omani territorial waters, killing one crew member and injuring eight others.

The ​United Kingdom Maritime Trade Operations agency said a tanker had been hit by an unknown projectile while traveling 40 nautical miles northeast of Oman’s Qalhat and that all crew were safe.

“The Hormuz Strait is OPEN, and will remain OPEN, with or ⁠without Iran. We are reinstating THE IRANIAN BLOCKADE,” Trump had said earlier on Monday on Truth Social.
“The U.S.A. will be, from this point forward, known as ‘THE GUARDIAN OF THE HORMUZ STRAIT’, but as such, and as a matter of FAIRNESS, will be reimbursed, ​at the rate of 20% on all cargo shipped.”

….The UN’s shipping agency pushed back against Trump’s proposal, saying it opposes any fees for straits used in international navigation and stressing that there is no legal basis for introducing mandatory tolls on strait transits.

….Iran’s state TV cited the Iranian army as saying that it targeted a “hostile” U.S. vessel with cruise missiles and U.S. facilities and equipment in ​Kuwait with drones. Iranian media also said the Revolutionary Guards shot down a U.S. MQ-1 drone over Hormuz, while sirens sounded early on Tuesday in Bahrain – home to another U.S. military base.

Brent Crude (September futures) jumped to $85.40 per barrel.

Brent Crude Futures (ICE September'26)

The Strategic Petroleum Reserve (SPR) fell to 319.5 million barrels on July 3, a decline of 6 million barrels for the week.

EIA Strategic Petroleum reserve (SPR)

Overall crude stocks, including SPR, declined to 1.517 billion barrels, the lowest level in 23 years.

EIA Crude & Petroleum Products Inventories (incl. SPR)

Stocks of Gasoline (blue) and Diesel (brown) are close to their floor of 200 million barrels and 100 million barrels, respectively.

EIA US Gasoline & Distillate Inventory

Gasoline prices declined to a US average of $3.777 per gallon by July 6.

EIA US Gasoline Prices

Diesel prices also softened to $4.578 per gallon.

EIA US Diesel Prices

However, the 3-2-1 crack spread3 widened to $62.17 per barrel, indicating that refiners are taking advantage of low finished product inventories to widen their margins. However, there is speculation that crude futures prices are being distorted, and refiners are paying more than the quoted price per barrel to secure supplies.

Energy Channel: 3-2-1 Crack Spread

The Dow Jones Industrial Average is tentative, with three red candles over the past five days, and a fall below 52,000 would signal a correction.

Dow Jones Industrial Average

Financial Markets

2-year Treasury yields jumped to 4.29%, more than 50 basis points above the target range for the Fed funds rate. Financial markets are anticipating higher crude prices to increase inflationary pressure, forcing the Fed to raise rates.

2-Year Treasury Yield (CNBC)

The Chicago Fed National Financial Conditions Index continues its downtrend, indicating ample liquidity in financial markets.

Chicago Fed National Financial Conditions Index

However, Bitcoin1 is testing primary support at 60,000, warning that financial markets are becoming risk averse. A fall below support would warn of a sharp contraction in liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields jumped to above 4.6% in anticipation of higher inflation and higher interest rates. A breakout above 4.7% would offer a target of 5.0% — a third rail for the economy.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index rallied in expectation of higher interest rates.

Dollar Index

The stronger Dollar triggered another Gold test of primary support at $4,000 per ounce. However, rising Trend Index troughs below zero indicate buying pressure at the support level.

Spot Gold

Energy Transition

The strong Dollar is also causing a sell-off in energy transition metals.

Sprott Uranium Miners ETF2 (URNM) is testing primary support at 50. Declining Trend Index peaks below zero warn of strong selling pressure.

Sprott Uranium Miners ETF (URNM)

Sprott Copper Miners ETF2 (COPP) crossed below its 50-week moving average, indicating another test of primary support at 32.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF2 (LITP) is testing primary support at 11.

Sprott Lithium Miners ETF (LITP)

Sprott Critical Materials ETF2 (SETM) has broken primary support at 30. A follow-through below the previous week’s low would confirm a target of 20.

Sprott Critical Materials ETF (SETM)

Conclusion

We expect a steep rise in crude prices. Lower inventory levels indicate there are fewer reserves to cushion the impact of a supply shortage. Falling gasoline and diesel inventories warn of a sharp price rise ahead.

Interest rates are rising in anticipation of higher inflation, fueled by energy prices, which in turn increases support for the Dollar.

The strong Dollar increases selling pressure on precious metals and commodities such as uranium, copper, lithium, and critical minerals.

High inflation may reduce speculative demand for Gold in the short-term because of the likely increased carrying cost, but it increases investment demand for the metal as an inflation hedge. What will light the afterburners, however, is if the Fed suppresses interest rates to support the Treasury market.

Chinese demand is the largest driver of Gold prices in the long term, and low prices will likely trigger an increase in buying, both through official channels and via backdoor non-monetary Gold purchases.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
  3. The 3-2-1 crack spread is calculated by subtracting the price of 3 barrels of crude from the sum of 2 barrels of gasoline and 1 barrel of diesel. The result is then divided by 3 to reflect the refiner’s gross profit per barrel of crude.
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Bitcoin Flags Shift to Risk-Off

Key Points

  • Brent Crude falls below $75 per barrel as the Strait of Hormuz gradually reopens.
  • However, crude oil reserves continue to decline.
  • Bitcoin is testing primary support, and stocks are weakening.
  • The Dollar is stronger, while Gold is testing primary support at $4,000 per ounce.

Brent Crude futures (Aug’26) fell below $75 per barrel on reports of increased traffic through the Strait of Hormuz.

Brent Crude Futures (ICE August'26)

From HFI Research:

The market is pricing a clean reopening, right on schedule. I am not convinced…

A reopening is neither as close nor as clean as the market would have us believe. Tankers have to start entering the Gulf for shut-in wells to be brought back on production. Minesweeping alone takes weeks after any ceasefire, redirected tankers need 30 to 40 days to reposition, and Tehran can keep the mere threat of attack alive to throttle passage at will.

US Strategic Petroleum Reserves continue to decline at the rate of 9 million barrels a week, falling to 331 million barrels on June 19.

Strategic Petroleum Reserve (SPR)

The ceasefire remains tenuous, with hostilities between Israel and Hezbollah in Lebanon a potential flashpoint. From Reuters:

In Washington, Lebanon and Israel discussed a U.S.-backed proposal for Israel’s forces to pull out of ⁠some territory it ​invaded to be handed back to Lebanese army control. But Israeli Prime Minister Benjamin Netanyahu said Israel would not pull troops out.

…At home, the reckoning is equally stark, said former U.S. official Dennis Ross. Netanyahu is increasingly boxed in between a U.S. president intent on ending the conflict and a domestic base resistant to ​concessions, particularly in Lebanon, he said. Withdrawal risks political backlash while escalation risks confrontation with Washington.

Bitcoin1 continues to test primary support at 60,000. A breach would warn of another decline, signaling a hard swing in financial markets away from risk assets.

Bitcoin (BTC)

The S&P 500 is in its fourth week of a mild sell-off, with declining Trend Index peaks indicating secondary selling pressure. A retracement to test support at 7000 is likely.

S&P 500

10-year Treasury yields are retracing for another test of support at 4.25% as lower oil prices ease inflation fears.

10-Year Treasury Yield

Dollar & Gold

The Dollar is strengthening in expectation of higher short-term interest rates, but new Fed Chair Kevin Warsh has yet to reveal his hand.

Dollar Index

Gold is testing primary support at $4,000 per ounce as the Dollar strengthens.

Spot Gold

Copper & Lithium

Energy metals are also experiencing a sell-off, with Copper and Lithium most prominent.

Copper

Sprott Copper Miners ETF2 (COPP) is headed for a test of primary support at 32, while Trend Index peaks below zero warn of long-term selling pressure.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF2 (LITP) is testing secondary support at 13. Declining Trend Index peaks warn of growing selling pressure, and a breach of support will likely test the primary level at 11.

Sprott Lithium Miners ETF (LITP)

Conclusion

The Dollar is strengthening amid expectations of higher short-term interest rates under the new Fed Chair, Kevin Warsh. But Warsh has yet to reveal his hand, and long-term Treasury yields are softening as fears of high inflation from spiking energy prices fade.

The ceasefire in the Persian Gulf is tenuous and could easily be disrupted by a flare-up of hostilities between Israel and Hezbollah in Lebanon. Stability in the region is even further out of reach than it was before 28 February and will likely remain so. States will likely build up larger strategic reserves and develop strategies to reduce their exposure to another closure of the Strait of Hormuz. This includes encouraging the use of electric vehicles and nuclear energy, two industries that we expect to be long-term beneficiaries from the conflict.

The biggest losers will likely be the Gulf States and Israel. The Gulf States have suffered an enormous setback in their ability to project themselves as a stable financial and industrial hub for future development. They will fall under Iran’s shadow, which will be able to exert far greater political sway in the region. Israel is also likely to suffer under whatever peace deal President Trump negotiates, with a financially stronger Iran able to extend its influence in the region and unlikely to be deterred from its long-term aims of regional hegemony.

Gold and commodities are falling as the Dollar strengthens, but we are convinced that this runs counter to the secular trend, which will likely last for decades. Increased fiscal spending and growing deficits will accelerate the debasement of the Dollar and other fiat currencies, with central banks continuing their shift to Gold bullion as the primary reserve asset.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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Crude Up, Gold Down

Key Points

  • President Trump rejects Iran’s proposal to reopen the Strait and discusses an extended US naval blockade.
  • Brent crude futures (June’26) jump to more than $120 per barrel.
  • The Fed kept interest rates on hold in Jerome Powell’s last FOMC meeting as Fed Chair.
  • Powell says he will stay on as governor for “an undetermined period of time.”

During a Tuesday meeting with oil executives, President Trump rejected Iran’s proposal to reopen the Strait and discussed extending the US naval blockade. (GroundNews)

WASHINGTON, April 29 (Reuters) – U.S. President Donald Trump met with top officials from Chevron (CVX.N) and other energy companies on Tuesday to talk about possible steps to calm oil markets if the blockade of Iranian ports continues for months, a White House official said on Wednesday.

The talks focused on U.S. oil production, oil futures, ​shipping and natural gas, the official said.

“They discussed the steps President Trump has taken to alleviate global oil markets ​and steps we could take to continue the current blockade for months if needed and minimize ⁠impact on American consumers,” the White House official said.

Talk of an extended blockade and a sharp fall in US inventories drove June’26 Brent crude futures to above $120 per barrel.

Brent Crude Futures (ICE June'26)

The EIA report for the week ended April 26 showed an accelerating decline in crude inventories, including the Strategic Petroleum Reserve (SPR).

EIA Crude Inventory (incl. SPR)

The inventory chart above includes the SPR, shown separately below.

EIA Crude Inventory (incl. SPR)

No Change at the Fed

The Fed left its target range for the funds rate unchanged at 3.5%-3.75% for the third consecutive meeting. There were four dissenting votes on the FOMC, with three opposing language that signaled possible future rate cuts, while Trump appointee Stephen Miran called for an immediate reduction. (AP/EuroNews)

Jerome Powell’s term as Chair ends on May 15, with his nominated successor, Kevin Warsh, likely to be sworn in before the next meeting, following approval by the Senate Banking Committee.

Powell indicated that he intends to remain on the Federal Reserve’s governing board for “an undetermined period of time”, citing concerns about what he described as “unprecedented” legal attacks by the Trump administration on the central bank.

Mr Powell said he would wait for the conclusion of an investigation into the Fed’s building renovations before stepping down fully.

“I’m waiting for the investigation to be well and truly over, with finality and transparency,” he said. “I will leave when I think it appropriate to do so.” His term as governor expires in January 2028.

Powell’s decision to stay on forces the resignation of Stephen Miran, a temporary Trump appointee, to make way for the appointment of Warsh as governor. The move denies President Trump the opportunity to nominate a replacement, which would give him greater influence over Fed monetary policy.

Long-term Treasury yields are rising in response to higher oil prices and the improved prospect of an independent Fed. 10-Year yields are expected to test resistance at 4.5%.

10-Year Treasury Yield

We expect the S&P 500 to retrace to test new support at 7000 as a looming global oil shortage overshadows robust quarterly earnings.

S&P 500

The Dow Jones Industrial Average retreated below short-term support at 49K, suggesting another correction.

Dow Jones Industrial Average

Gold found support at $4,500 per ounce, but the rally may be short-lived if oil prices keep rising.

Spot Gold

Conclusion

An early reopening of the Strait of Hormuz is unlikely. We expect a prolonged closure, with shortages driving crude oil prices to between $140 and $150 per barrel by the end of May.

Higher crude prices increase upward pressure on long-term Treasury yields, which would be bearish for stocks.

We also expect Gold to test support at $4,000 per ounce as Gulf states and major oil importers draw on their reserves.

Acknowledgments

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Waiting for Godot

Key Points

  • President Trump said he would indefinitely extend the ceasefire with Iran to allow for further peace talks, but the blockade of Iranian ports continues.
  • According to Tasnim, the Iranian negotiating team informed Pakistani mediators that it will not attend talks in Islamabad on Wednesday, and “there is currently no prospect for participating in the negotiations.”
  • The last oil tankers to traverse the Strait of Hormuz before the conflict started are now offloading their cargoes.
  • Global markets face a crude oil shortage of 10 million barrels per day for as long as the Strait of Hormuz remains closed.
  • The IEA coordinated release of 400 million barrels from reserves will last 40 days.
  • China halted purchases and released crude from its extensive reserves to minimize disruption, but is expected to resume purchases in weeks.
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Stabilizing crude oil prices

Volatile crude oil prices damage production capacity and economic growth and cause volatile consumer price inflation.

At the height of the 2020 pandemic, Nymex WTI crude oil prices fell to an unprecedented low of -$13.10 per barrel as demand dried up and oil storage facilities reached capacity. Producers faced a dilemma: either shut down wells or sell at a loss, effectively paying end users to consume their oil.

Nymex WTI Crude

The Department of Energy failed to capitalize on this opportunity to replenish the Strategic Petroleum Reserve (SPR), buying only 21 million barrels of crude over four months. US field production fell from 13 million to below 10 million barrels per day as shale producers shut wells rather than produce at below cost. The damage done to balance sheets meant that it took several years to restore production as prices recovered.

US Crude Oil Production

Russia’s invasion of Ukraine in February 2022 caused a spike in crude oil prices, with WTI crude peaking at close to $125 per barrel. In response, the Biden administration released 290 million barrels from the SPR. This tipped the oil market into surplus despite OPEC+ production cuts, with Nymex crude prices falling below $75 per barrel.

Strategic Petroleum Reserve (SPR)

Shrinking demand from China and rising non-OPEC production, led by the US, has maintained prices at close to $75 per barrel. Now, hostilities between Israel and Iran threaten to escalate to the point that crude oil supplies from the Middle East could be affected.

Joseph Webster from the Atlantic Council argues that the DoE should not hesitate to make further releases from the SPR to stabilize prices in the event of a supply threat. Net crude imports to the US (blue below) have shrunk to 2 million barrels daily from 8 million in 2017, meaning the SPR provides more than 23 weeks of cover if all imports were to be terminated.

US Crude Net Imports

Further releases from the SPR would not only help to keep prices low but also stabilize them, which can be highly profitable for the US government. SPR releases under the Biden administration, at an average of close to $90 per barrel, will net about $20 per barrel if the SPR is replenished at current prices—a profit of nearly $600 million.

Conclusion

Releases from the Strategic Petroleum Reserve (SPR) should be used to stabilize crude oil prices in case of an interruption to crude oil imports. This would likely have four benefits:

First, SPR releases would ensure an interrupted supply to industry and minimize the impact on the economy.

Second, replenishing reserves when prices are low would help to maintain a floor under prices and support shale producers, avoiding the shut-down of wells when prices fall too low to cover operating costs.

Third, stabilizing energy prices can be achieved at no cost to the taxpayer. Selling when prices are high and buying when prices are low will likely show a profit.

Lastly, SPR releases would help to keep a lid on inflation. Energy prices impact the consumer price index directly through gasoline and heating prices to the consumer but more significantly through the energy cost component of goods and services. The chart below shows how energy CPI (orange) increased ahead of headline CPI in 2021 and similarly led the decrease in 2022-2023.

CPI & CPI Energy

Acknowledgments

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CPI shock upsets markets

The consumer price index (CPI) dipped to 8.25% (seasonally adjusted) for the 12 months to August but disappointed stock and bond markets who were anticipating a sharp fall.

CPI

The S&P 500 fell 4.3% to test support at 3900. Follow-through below 3650 would confirm earlier bear market signals.

S&P 500

Services CPI — which has minimal exposure to producer prices and supply chains — climbed to 6.08%. Rising services costs indicate that inflation is growing embedded in the economy.

CPI Services

Fueled by strong growth in average hourly earnings.

CPI & Wage Rates

But it is not only services that present a problem.

Food prices are growing above 10% p.a. — signaling hardship for low income-earners.

CPI Food

The heavily-weighted shelter component — almost one-third of total CPI — climbed to 6.25%. We expect further increases as CPI shelter lags actual home prices — represented by the Case-Shiller 20-City Composite Home Price Index (pink) on the chart below — by 6 to 12 months.

CPI Shelter

CPI energy is still high, at 23.91% for the 12 months to August, but the index has fallen steeply over the past two months (July-August).

CPI Energy

The decline is likely to continue until the mid-term elections in November, as the US government releases crude from its strategic reserves (SPR) in order to suppress fuel prices.

SPR Levels

The reduction in strategic reserves is unsustainable in the longer-term and reversal could deliver a nasty surprise for consumers in the new year.

SPR Lowest since 1984

Conclusion

Strong CPI growth for the 12-months to August warns that inflation will be difficult to contain. Services CPI at 6.08% also confirms that inflation is growing embedded in the economy.

Energy costs are falling but this may be unsustainable. Releases from the strategic petroleum reserve (SPR) are likely to end after the mid-term elections in November.

The Fed is way behind the curve, with the real Fed funds rate (FFR-CPI) at -5.92%, below the previous record low of -4.97% from 1975.

Real Fed Funds Rate (FFR-CPI)

We expect interest rates to rise “higher for longer.” A 75 basis-point hike is almost certain at next weeks’ FOMC meeting (September 20-21).

Long-term Treasury yields are rising, with the 10-year at 3.42%. Breakout above resistance at 3.50% is likely, signaling the end of a four decade-long secular bull trend in bonds.

10-Year Treasury Yields

Stocks and bonds are both falling, with the S&P 500 down 18.0% year-to-date compared to -25.4% for TLT.

S&P 500 and iShares 20+ Year Treasury ETF (TLT)

The best short-term haven is cash.

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