US President Biden announces 1 million b/d SPR crude release for six months

The Biden administration said March 31 it will release an unprecedented 1 million b/d from the US Strategic Petroleum Reserve for the next six months as part of efforts to rein in gasoline prices that have soared following Russia's invasion of Ukraine.

The six-month drawdown by the US would amount to about 180 million barrels, depleting almost a third of the SPR and taking the stockpile to its lowest level since 1984. Barrels from this SPR release are expected to hit the market starting in May.

US President Joe Biden said he was waiting to hear from allies on exactly how many barrels they planned to release but guessed that the number could be as high as between 30 million and 50 million barrels.

An administration official indicated that there could be more clarity on that following an April 1 meeting of the International Energy Agency.

Paul Sheldon, chief geopolitical advisor at S&P Global Commodity Insights, said the full 180 million barrels would likely be purchased "given our anticipation that Russian crude shut-ins will begin by late April and ultimately reach 2.8 million b/d."

S&P Global forecasts net US SPR deliveries of 775,000 b/d between March 26 and end-2022, including 51 million barrels remaining from other recent announcements.

"IEA partners could also add to ongoing deliveries of 32.7 million barrels from their strategic crude and product reserves," Sheldon said.

The Department of Energy will use revenues from the sale to restock the emergency reserve when prices are lower, likely in future years.

"The pledge to buy back the crude down the road creates ambiguity over timing and longer-term impact, given possible tension with Congress over funding," Sheldon said.

Price relief

Biden said he expected oil prices to fall "and continue to come down" in response to the oil reserve release, with gasoline prices following suit but delayed by days or weeks. Prices at the pump "could come down very significantly," the president said, suggesting up to 35 cents/gal.

Crude and gasoline futures fell following the news March 31, with NYMEX May crude settling down $7.54 at $100.28/b, and NYMEX April RBOB settling 13.54 cents lower at $3.1896/gal.

The SPR release's longer term impact on US gasoline prices and the broader supply-demand problem is more of a question mark, with some analysts warning of potential unintended consequences.

"The additional SPR release won't by itself ‘fix' the problem of lost Russian supply, but it will help," said Aaron Brady, executive director of global oil research for S&P Global Commodity Insights. "One million b/d of additional supply will make a material difference in global supply-demand balances."

Edward Moya, senior market analyst for OANDA, said the SPR decision may prevent $150/b oil, but the impacts likely will not be as significant as US gasoline consumers desire.

"I still think we should get used to $100/b oil for the time being as long as these geopolitical risks remain," Moya said. "This is a Band-Aid solution for a major wound. It's really ammunition you really should have saved for later if it becomes really clear we're not going to see a de-escalation."

On the surface, the decision looks largely like a political ploy designed to help Democrats during the midterm elections later this year, said fuel analyst Patrick De Haan of GasBuddy.com.

"The president is basically trying to bring prices down and use it as an SPR -- strategic price reduction," De Haan said.

Possible backfire

The fear is that this could backfire and cause demand to rise while adding more nervousness to the markets with the US further depleting global oil inventories, he said.

"Looming exhaustion of strategic stockpiles could send a bull signal to structurally tight markets similar in character to the one that lean OPEC spare capacity sends: without a cushion, even small supply interruptions could deliver outsized price spikes," ClearView Energy Partners said in a research note.

The Biden administration may be hoping "to shock still-recalcitrant OPEC+ parties into adding new supply," ClearView added. "But … we would expect OPEC+ producers to watch the dwindling of US strategic stockpiles with great interest: the emptier the SPR gets, the more power OPEC spare capacity could acquire. And OPEC+ might conceivably respond with a smaller-than-expected increase in flowing barrels."

S&P Global noted that the underlying supply picture remains very tight with low inventories and spare global capacity at just 1.4 million b/d by June, while risks to other supplies persist in Libya, and missile attacks are rising in Iraq, the UAE, and Saudi Arabia.

'Use it or lose it'

To incentivize companies to produce more oil in the short term, Biden also proposed a "use it or lose it policy" that would force companies to pay fees on unused wells on federal lands and on acres of leased public lands that are not producing.

He reiterated White House rhetoric that the oil and gas industry is sitting on more than 9,000 unused but approved permits for production on federal lands and more than 12 million unused acres.

The president will likely face an uphill battle when presenting such a policy to Congress as GOP lawmakers have been quick to defend oil and gas producers and instead point the finger back at Biden's climate agenda.

AXPC CEO Anne Bradbury bashed the announcement as "finger pointing and politically motivated policies that do nothing to actually lower prices."

"What we need is a collaborative approach from this administration, recognizing that we are developing as quickly as possible given market conditions and the current regulatory framework that this administration has put in place," Bradbury said. "The better approach to help alleviate rising energy prices is to focus on supporting domestic production of oil and natural gas."

American Petroleum Institute President and CEO Mike Sommers said Biden's remarks portrayed "a fundamental misunderstanding of how leases work," and that the industry stood ready to work with the administration as nearly 5,000 permits await approval and thousands more are tied up in litigation.

Presently, the oil and gas industry has indicated that it could get an additional 1 million b/d of crude online as early as this fall, but that still leaves months before that production is online.

SPR logistics

Stephen Ellis, midstream energy strategist at Morningstar, said it is reasonable that the US may be able to withdraw close to 1 million b/d from the SPR caverns, especially because regular drawdowns already were occurring with increased frequency.

The greater challenge, he said, is storing and transporting all of the crude oil – to the East Coast and to European export markets without too greatly impacting the shipments of new domestic crude oil production.

"It might create issues in terms of storage and transportation along the Gulf Coast," Ellis said. "It's fixable though. It's a mix of sour and sweet, so I would expect some of the heavier barrels to go to Europe. We'll be short oil in Europe from Russian oil exports, so we'll likely send more barrels to Europe."

Potentially working in the administration's favor is a lot of excess storage capacity along the US Gulf Coast. As of March 25, net USGC crude oil stocks of 163.585 million barrels were only filling 39% of the region's working storage capacity of 420.017 million barrels, which is near multi-year lows, according to the US Energy Information Administration.

While the bulk of past SPR sales have been delivered via pipeline, shipping is likely to also be needed for transport to some parts of the country, especially given the historic volumes at play, the administration official said. As such, the US stands ready to promptly process Jones Act waiver requests to ensure timely delivery of oil, the official said, with several agencies already tasked to make that process work smoothly.

The administration's consideration of waivers to the Jones Act would allow East Coast refiners to access the light, sweet volumes of SPR oil, allowing them to back out imported cargos from Africa, the North Sea and elsewhere, potentially solving much of the logistical issues, S&P Global's Brady said. And the SPR sour barrels are a reasonable substitute for Russian Urals.

Noting that US record SPR draws in the past are closer to 850,000 b/d, Brady said it is unlikely that 7 million barrels will be consistently drawn each week. Ships and buyers need to be lined up and some bumpiness in timing is inevitable. But a 1 million b/d drawdown rate remains possible with the right execution.