The U.S. would probably happily re-load its Strategic Petroleum Reserve (SPR), but it is very difficult to do so while the global oil market is running a deficit.
That’s what Bjarne Schieldrop, Chief Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), said in a report sent to Rigzone on Monday, adding that the country has drawn down its SPR over the latest years to “only 50 percent of capacity”.
“It will have to wait to the next oil market downturn,” Schieldrop said in the report.
“But that also implies that the next downturn will likely be fairly short lived and also fairly shallow. Unless of course the U.S. chooses to forgo the opportunity,” he added.
In the report, Schieldrop noted that crude oil prices would probably have to rally to $150-200 per barrel before the U.S. would consider pushing another 100-200 million barrels from the SPR into the commercial market.
“As such the firepower of its SPR as a geopolitical oil pricing tool is now somewhat muted,” he said in the report.
The Chief Commodities Analyst highlighted in the report that most of the recent U.S. SPR draw down was “in response to the crisis in Ukraine as it was invaded by Russia with loss of oil supply from Russia thereafter”.
Security of Supply
The U.S. has no problems with security of supply of crude oil, Schieldrop stated in the report.
“U.S. refineries have preferences for different kinds of crude slates and as a result it still imports significant volumes of crude of different qualities,” he said in the report.
“But overall, it is a net exporter of hydrocarbon liquids. It doesn’t need all that big strategic reserve as a security of supply anymore … Essentially the U.S. doesn’t need such a sizable SPR anymore to secure coverage of its daily consumption,” he added.
Schieldrop highlighted in the report that the U.S. is the largest oil consumer in the world.
“As such it is highly vulnerable to the price level of oil,” he added.
“The U.S. SPR today is much more of a geopolitical tool than a security of supply tool. It’s a tool to intervene in the global oil market. To intervene in the price setting of oil,” he went on to state.
“The U.S. SPR is now drawn down to 50 percent, but it still holds a sizable amount of oil. But it is little in comparison to the firepower of OPEC,” he continued.
Saudi Arabia can lower its production by one million barrels per day for one year and it will have eradicated 365 million barrels in global oil inventories, Schieldrop noted in the report.
“And then it can [do] the same the year after and then the year after that again,” he added.
According to the Energy Institute’s (EI) first, and the overall 72nd, statistical review of world energy, the U.S. was the country with the highest oil liquids consumption in the world last year, at 20.280 million barrels per day. That figure marked 20.2 percent of global oil liquids consumption in 2022, the review highlighted.
In the report, Schieldrop said the U.S. “has now fired one big bullet of SPR inventory draws”.
“It really helped to balance the global oil market last year and prevented oil prices from going sky high,” he added.
“With new geopolitical realities, the U.S. probably will want to rebuild its SPR to higher levels as it is now an important geopolitical tool and an oil price management tool,” he noted.
“But rebuilding the SPR now while the global oil market is running a deficit is a no-go as we see it,” he continued.
Schieldrop stated in the report that “an oil market downturn, a global recession, a global oil market surplus where OPEC no longer want to defend the oil price with reduced supply is needed for the U.S. to be able to refill its SPR again, unless it wants to drive the oil price significantly higher”.
At the time of writing, the price of Brent crude oil is trading at $90.17 per barrel. The price has risen from a close of $84.07 per barrel on October 5.
Weekly U.S. ending stocks of crude oil in the SPR stood at 351.274 million barrels on October 13, according to data on the U.S. Energy Information Administration (EIA) website, which was last updated on October 18 and which spans from August 20, 1982, to October 13, 2023.
The data shows that weekly U.S. ending stocks of crude oil in the SPR were at their highest on January 1, 2010, at 726.617 million barrels, and at their lowest on August 20, 1982, at 270.455 million barrels.
According to the U.S. Department of Energy’s (DOE) website, the SPR is the world’s largest supply of emergency crude oil. It was established primarily to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the U.S. under the international energy program, the site notes.
“The federally owned oil stocks are stored in huge underground salt caverns at four sites along the coastline of the Gulf of Mexico,” the DOE site states.
“The sheer size of the SPR (authorized storage capacity of 714 million barrels) makes it a significant deterrent to oil import cutoffs and a key tool in foreign policy,” it adds.
Repurchase of Crude Oil
A White House fact sheet published in October 2022 revealed that the Biden Administration intended 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,” the fact sheet noted at the time.
“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,” it added.
The fact sheet also highlighted that the U.S. Department of Energy was issuing a notice of sale on October 19, 2022, for 15 million barrels from the SPR to be delivered in December that year.
“This sale will complete the historic, 180-million-barrel drawdown the President announced in the spring, which has helped to stabilize crude oil markets and reduce prices at the pump,” the fact sheet stated.
Rigzone has asked the DOE and the White House for comment on Schieldrop’s report. At the time of writing, Rigzone has not yet received a response from either department.