US SPR Sales: An Explainer

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The US Department of Energy (DOE) plans to release another 10 million barrels of strategic stocks for delivery in November, the latest allotment from the 180 million barrels in emergency sales authorized by US President Joe Biden in March.

Assuming buyers have the appetite, that will bring the volume from emergency sales to 165 million bbl this year. Below, Energy Intelligence examines some of the fundamental questions related to the US’ largest-ever release of stocks from the Strategic Petroleum Reserve.

How much has been sold, what quality, and what price?

At the start of the year, the US SPR contained 593.4 million barrels, per data from the Energy Information Administration (EIA). This was already lower than in years past — indeed, SPR volumes had been above 600 million bbl since May of 2003 and only dropped below that mark in December of last year.

By early September, SPR volumes dropped to just 434.1 million bbl, their lowest since October of 1984.

The SPR had been downsizing ahead of Russia’s invasion of Ukraine in keeping with legislation seeking to modernize the system and falling imports of crude, which lowered the threshold needed to comply with International Energy Agency regulations.

But selling intensified in the wake of the invasion as the administration sought to stabilize the oil market.

Initially, sour crude grades, which contain more sulfur, dominated draws. However, the last two sales were tilted toward sweeter crude - the latest two notices of sale include just 2.8 million bbl of sour crude.

Removing sulfur requires natural gas, which has become more expensive over the year, especially in Europe. Market players say refiners are buying more sweet crude grades than they were at the start of 2022, in part to avoid increased operating costs.

In total, buyers — largely US firms — have spent about $16.6 billion buying government stocks, for an average price of around $107 per barrel.

How have the sales impacted balances and prices?

The SPR releases helped offset the imminent loss of Russian volumes in the wake of embargos and bans by much of Europe and North America, but not in totality.

Washington’s announced sales initially suggested an additional 180 million bbl, or 1 million barrels per day, of supply through October. But the figures do not match perfectly, and the latest announcement runs through November.

In addition, the releases consisted of crude, while the most acute shortages are in refined products and most acutely diesel; to wit, the Nymex diesel futures contract has maintained a premium to gasoline throughout the year, even during peak-demand season in the summer. The current premium is almost 80¢ per gallon.

Oil prices, and especially gasoline prices at the pump for consumers, did fall from early-year heights and have continued to slide in the third quarter. But while the SPR sales played a role in pressuring oil prices, market players have said that role was relatively small. The Treasury Department, in analysis released after the fourth emergency sale was awarded, found prices at the pump could be “up to” 40¢ lower per gallon in the US on the back of US and allies’ stocks releases.

Other factors have been more influential, including not only widespread fears of recession but also the impact of higher prices themselves – demand for gasoline was under pressure even during the summer, when it tends to peak, as consumers adjusted their behavior in the face of prices north of $5 per gallon at the pump.

Rather than pressuring oil prices outright, the releases have helped put a ceiling on the commodity. To wit, oil futures settled higher on Monday and maintained gains after official close of trading despite the SPR announcement.

Is this it?

US SPR sales were set to stop at the end of October, removing supply from a market that is still tight.

Monday’s announcement indicates the DOE is willing to use the authorized 180 million barrels outside of the original six-month time frame initially announced by the Biden administration. Deliveries for the sixth sale are scheduled to begin in November, which would be the eighth month for the emergency sales. The administration still has about 15 million barrels to work with, and officials say they will make decisions about future releases based on “market signals and making sure our releases align with the needs,” as a Department of Energy official put it Monday. That could be critical as G7 nations look to implement a cap on Russian oil prices that some observers believe could see a further tightening of the market.

Is the market ready?

Yet oil prices continue to drop amid persistent fears of recession, hawkish fiscal policy, and strong bearish sentiment.

Some traders say they see a potential sharp reversal in the cards.

“I think the market should be freaking out” about the end of SPR sales, said Phil Flynn of Chicago’s Price Futures Group. “I think when the releases end, it’s going to have the impact of losing a major producer — it will really tighten supplies.”

Flynn said that the end of the SPR draws could tack on between $5 and $10 to oil prices.

In its latest forecast, investment bank Bank of America noted that in their view, amid Opec actions and the impending end of SPR sales, the floor for Brent crude in the options market has moved from around $60 to $80.

Once SPR draws end, there are no offsets to the loss on the horizon; a deal that would allow Iranian barrels to return to market remains aspirational, and far from opening the taps, Opec and its allies have announced slight cuts to production.

Concerns about Opec’s spare capacity also abound.

Meanwhile, the EU’s embargo of Russian petroleum is intensifying, and sky-high natural gas prices are likely to prompt fuel switching, bolstering oil demand even as available sources dry up.

When and how will the SPR restock?

US officials have pledged to refill the SPR as a way of trying to mitigate the chances that the SPR releases would displace US production that would otherwise come on line. That, of course, could lead to higher prices — and, indeed, reassuring suppliers of future demand is the point of the Biden administration signaling it intends to refill the SPR. It is so far unclear what price the administration believes is sufficient, although Bloomberg recently reported officials considering $80/bbl as the price at which they might consider purchases.

To give producers those assurances, the Biden administration is changing how it will do repurchases for the SPR. The agency recently proposed rules to offer fixed price contracts well in advance of a restock. It will take several months for that process to be worked out, and the agency does not expect to make repurchases until after the fiscal year that ends in September of 2023.

Crude Oil, Oil Inventories, Oil Supply, Non-Opec Supply, Policy and Regulation
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