Oil prices settled above $120 Monday as U.S. lawmakers drafted a framework agreement that would ban U.S. imports of Russian oil. U.S. oil stocks rallied, boosted by oil prices and merger news.
A deal announced Monday by lawmakers from both camps in the House Ways and Means Committee and the Senate Finance Committee aimed to curb U.S. imports of oil from Russia. The legislation would empower the president to raise tariffs on other imports from Russia and Belarus. A House vote on the measure could happen as soon as Wednesday, Bloomberg reported.
Secretary of State Antony Blinken said Sunday that the White House is speaking to European allies in "a coordinated way at the prospect of banning the import of Russian oil while making sure that there is still an appropriate supply of oil in world markets."
The European Union has so far not agree to such an embargo. U.S. German Chancellor Olaf Scholz said Monday he has no plans to suspend Russian energy imports as the EU's energy needs currently can't be secured without them.
The U.S. imports a little more than 400,000 barrels of oil per day from Russia, according to the Energy Information Administration. The bulk of that are finished products, rather than crude oil. The small amount of actual crude oil from the country goes to refineries needing a higher sulfur content crude than what is produced in the U.S.
The EU is more dependent on Russian energy. The bloc imports 25% of its oil and 40% of its natural gas flows.
West Texas Intermediate settled 3.9% higher at $120.13 per barrel. Futures traded as high as $130.50 in early trade on Monday. Global benchmark North Sea Brent closed up 4.9% to $123.94 after hitting $130 over the weekend.
While no official embargo from the EU is likely, oil companies have scaled back their links to Russia.
BP said it would exit its nearly 20% stake in Russia's Rosneft energy company. Shell announced that it would end its involvement in the Nord Stream 2 natural gas pipeline project. And Exxon Mobil is now refusing to invest in new developments in Russia. All three oil stocks closed higher Monday.
U.S. Oil Stocks Can't Boost Supply
The U.S. is the world's top oil producer, surpassing Russia and Saudi Arabia in recent years, but Wall Street has put pressure on U.S. oil stocks to remain capital disciplined instead of drilling to keep boosting supply.
However, even if capital discipline wasn't pushed by investors this year, supply chain issues and a tight labor market would limit the amount of new supply from U.S. oil stocks, according to an analyst note Monday from Tudor, Pickering, Holt & Co.
"Based on conversations with the industry, it appears that even if operators wanted to add meaningful activity in 2022, in order to line up the logistics it may take up to six months before drilling could begin in earnest and another three to six months from spud to sales before volumes would enter the market pushing production into (the first half of 2023). At least for the next 12 months, any loss on Russia supply will not be met with upside to U.S. growth."
But What About Saudi Arabia?
As U.S. companies will need time to ramp up supply, President Biden is reportedly considering a trip to Saudi Arabia to repair relations and ask the kingdom to produce more oil, according to Axios.
Saudi Arabia is the de facto leader of OPEC+, which includes Organization of the Petroleum Exporting Countries and nonmember partners like Russia. The group has slowly been increasing production by 400,000 bpd each month in the wake of the Covid-19 pandemic. But the slow and steady increase is doing little to help lower oil prices.
"Current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market, and that current volatility is not caused by changes in market fundamentals but by current geopolitical developments," OPEC+ said in a press release following Wednesday's meeting.
But so far the group has had mixed success in producing enough oil even to meet its current output goals.
The New York Times reported that U.S. officials are in Venezuela meeting with President Nicolas Maduro as Venezuelan oil could replace at least a portion of Russian crude.
Oil Stocks Likely To Benefit
There will be direct and indirect winners if imports of Russian crude are banned in the U.S., according to Stewart Glickman, energy equity analyst at CFRA Research. Canadian and Mexican companies that supply heavier grades of crude, like Imperial Oil Canada, will be some of the direct winners.
While U.S. E&Ps produce a lighter, sweeter crude than Russia, those oil stocks that aren't heavily hedged will be indirect winners as global oil prices go up. Hedging is a strategy in which companies commit future production at contract prices agreed to by customers. Hedging tends to benefit companies when oil prices decline, and benefit customers when oil prices rise.
Glickman said that Continental Resources, historically, has always been among the least forward-hedged on their crude production. Devon Energy has only 25% of its oil forward hedged for the year. Pioneer Natural Resources and EOG are also less hedged than peers. These companies have broader exposure to big oil price gains.
Most of the heavy Russian crude heads to the Gulf Coast where the majority of America's refining capacity is based as it is needed to be mixed with other types of crudes to get a full range of refined products.
U.S. Shale Mergers
Oil stocks received an additional boost after Whiting Petroleum announced it would buy Oasis Petroleumin an all-stock deal that values the new combined company at $6 billion.
Under the terms of the deal, Whiting shareholders will receive 0.5774 shares of Oasis common stock and $6.25 in cash for each share of Whiting common stock owned. Whiting shareholders will own approximately 53% and Oasis shareholders will own approximately 47% of the combined company.
The two companies will announce a new name and ticker symbol prior to the deal closing.
Whiting shares closed 1.8% higher at 84.96 on the stock market today. Oasis soared 5.5% to 152.45. Both oil stocks are trading at 52-week highs.
Occidental Petroleum shares reversed early gains and slipped 1.4% to 565.38. Warren Buffett's Berkshire Hathaway disclosed that it bought a 9.8% stake in the company, about $5 billion shares.
The news comes as activist investor Carl Icahn said he sold the rest of his Occidental shares, according to a Wall Street Journal report. Icahn was a vocal critic of Occidental's takeover of Anadarko Petroleum in 2019.
Follow Gillian Rich on Twitter at @GillianRich_ for energy news and more.
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