- Dept of Energy says initial purchase for SPR will be 3 million barrels
- Dept. says it has intent to buy more later in the year but provides no schedule
- Analysts say crude prices will decide on purchase; refill won’t be barrel for barrel
It was the proclamation oil longs had awaited since President Joe Biden authorized the release of the first barrel of crude from the U.S. Strategic Petroleum Reserve in November 2021. Eighteen months and nearly 250 million barrels later — the most withdrawn from the so-called SPR in its five decades — the Biden administration says it’s ready to refill the reserve.
In a news release issued Monday. the Department of Energy said it will buy up to 3 million barrels initially for the SPR under what it described as a “three-part replenishment plan.” Oil bulls, of course, couldn’t care less about the administration’s fanciful term or, for that matter, anything else about the replenishment other than how many barrels will ultimately be purchased and over how long?
At this point, the department hasn't answered. Logic suggests that the first round of buying will commence after current congressionally mandated sales from the SPR, due through June, are exhausted.
The department did offer three points of guidance, though. It said it “intends to purchase more oil later this year.” Acquisitions will include outright purchases and loaned barrels, including a premium when returned. It also said it had canceled 140 million barrels in mandated SPR sales scheduled for fiscal years 2024 through 2027.
That last part was probably more academic than anything else as no one, not even President Biden’s closest allies, would expect continued drawdowns from the SPR over the next four years — not when the reserve’s balance is already at its lowest since 1983. With a little more than 362 million barrels in the reserve, it will take just over 82 days to draw it completely down at a maximum extraction rate of 4.4 million barrels per day (though the norm for withdrawal has been one million barrels daily).
With Monday’s revelation of the administration’s plans for the SPR, one of the announcements most anticipated by the oil market over the past year and a half landed with a dull thud rather than the loud bang that oil bulls had expected.
U.S. crude’s West Texas Intermediate, which settled Monday’s session up 1.5% at $71.11 per barrel — partly on the impact of wildfires on Canada’s oil output and partly on speculation about the reserve refill, which Bloomberg had been arduously reporting over the past week — only got to a post-session high of $71.67 after the government confirmed its intent to replenish the SPR.
By Tuesday’s noon trading in Asia, the so-called WTI benchmark for U.S. crude had risen a little more to a peak of $71.78. Slower-than-expected industrial production and retail sales growth in China — the world's largest oil consumer — had probably restrained the market from immediately climbing further.
In all likelihood, WTI will rally more in its New York session and over the coming days if the bulls have their way. Yet, they may not get their way if worsening economic conditions in the United States and China — along with a simmering U.S. debt crisis and uncertainty of whether the Federal Reserve is done with aggressive rate hikes to fight inflation — turn out to be a greater worry.
The most thoughtful pointer on the matter probably came from long-time energy market commentator and hedge fund operator John Kilduff, who observed that “we only have this 3-million-barrel purchase announced by the DoE and its intention to buy more later in the year.” He adds:
“At this point, no one outside the administration knows the number of barrels it’s ultimately planning for the SPR’s refill. I’m not sure the administration itself knows. That’s because we all know the one thing that’s going to decide that: The price of crude. If crude prices start to get out of hand again, the DoE will just cancel further purchases.”
The administration said toward the end of last year that it aimed to refill the reserve when prices were at or below about $67-$72 per barrel.
Kilduff said,
“It’s nice to think that the administration will refill barrel for barrel what it took out. The truth is it may get to 20%, then stop because the price is no longer advantageous for stockpiling. If the longs in the market think the administration can be held at ransom to refill the reserve completely, they’d better think again.
The notion within the DoE is that the SPR is probably not needed as much these days as 50 years ago. As a strategic buffer, its importance cannot be denied. But we have many ways these days to source the oil we need despite the market squeeze we are experiencing.”
While the West’s sanctions over Russia undoubtedly, form the single largest source of oil supply loss — aside from OPEC+ output cuts — global production of crude has begun recovering from the worst disruptions of the pandemic era. Russia exports and produces huge volumes of crude, cheating on its pledge to key OPEC+ ally, Saudi Arabia.
Notwithstanding current wildfires and occasional pipeline issues in North America, Canada remains a stable source of crude supply to the United States, providing just over half of U.S. import needs. Domestic U.S. output has also steadied at around 12 million barrels per day, just about a million less than its record high three years. In fact, U.S. shale oil production is set to rise to the highest on record in June, the Energy Information Administration, a unit of the energy department, said in a forecast.
Outside of the United States, Iraq’s production is projected to grow 25% over the next five years. Iran’s oil exports are reportedly at their highest since 2018 despite sanctions from the days of the Trump administration. In Venezuela, Chevron (NYSE:CVX) will begin a new phase of higher production next month.
And last but not least, Guyana's oil exports jumped 164% last year. Rystad Energy also estimates Guyana will be pumping 1.7 million barrels per day by 2035, which is higher than other major offshore basins, including the Gulf of Mexico, ranking the country as the world's fourth largest offshore oil producer.
President Gerald Ford established the SPR in 1975 after the Organization of Arab Petroleum Exporting Countries — the sister group to OPEC, or the Organization of the Petroleum Exporting Countries — imposed an oil embargo against the United States, triggering an energy crisis that sent the U.S. economy into a recession. At its inception, the reserve was explicitly stated for emergency use.
Accordingly, the SPR was used several times to stabilize supplies, including during the Iraq-Kuwait crisis in 1990-91, Hurricane Katrina in 2005, and the Middle East disruptions of the Arab Spring in 2011. But several U.S. presidents also released oil from the reserve during political campaign seasons, often saying the purpose was to bolster supplies, not explicitly to reduce prices.
Biden has, however, had a tougher time making a case. His use of the SPR has been a highly-charged matter for both oil bulls and his political rivals. Both sides accuse him of indiscriminately releasing hundreds of millions of barrels from the stockpile to subdue crude prices and shore up his standing with voters just ahead of the 2022 U.S. midterm election.
In his defense, Biden said he was acting to reduce record-high fuel pump prices, which stood at above $5 per gallon last June and now hovers at around $3.50. The administration also blames last year’s high crude prices for U.S. inflation getting to four-decade highs of above 9% in June.
The SPR statement released on Monday reinforced the president’s argument, saying that analysis by Treasury Department indicated that last year’s U.S. releases, along with coordinated sales of oil from the reserves of international partners of the United States, succeeded in reducing pump prices of gasoline “by up to roughly 40 cents per gallon compared to what they would have been absent these drawdowns”.
Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.