US DOE to buy up to 3 mil barrels of sour crude for Aug delivery to start SPR refill

The US Department of Energy May 15 announced plans to repurchase oil to begin replenishing the Strategic Petroleum Reserve, fulfilling Energy Secretary Jennifer Granholm's commitment to lawmakers to begin the refill process this summer.

The DOE issued a solicitation for up to 3 million barrels of sour crude for delivery in August to the Big Hill SPR site in Texas. Bids of at least 300,000-barrel minimum offer quantities are due by 10 am CT May 31, and contracts will be awarded no later than June 16, according to the solicitation.

Crude volumes at the SPR stood at 362.01 million barrels the week ended May 5, according to the Energy Information Administration, the lowest level since October 1983. The US last year completed an unprecedented 180-million-barrel release over several months to combat energy price hikes spurred by Russia's invasion of Ukraine.

The DOE in October laid out a plan for repurchasing crude to replenish the SPR when WTI crude oil was at or below $67-$72/b. Its first solicitation, issued in December, resulted in no awards as the department deemed that the price and other factors would not have been a good deal for taxpayers.

The largest-ever drawdown from the emergency stockpile sold oil at an average price of $96/b, according to the DOE, and the department has committed to buying back oil at a lower price to make a return for taxpayers.

NYMEX front-month crude settled up $1.07 at $71.11/b May 15, rebounding from a decline seen the prior three sessions.

However, "because the DOE does not plan to use the new fixed-price contracting authorities, the actual acquisition price could be higher than today's prices," analysts at ClearView Energy Partners said in a research note.

The DOE last year finalized a first-of-its kind rulemaking that gives it the option to pay a fixed price for crude at the time a transaction is executed. Previously, regulations allowed the department to enter into contracts for future delivery of oil for the SPR but tied the price of those purchases to a market index at the time of delivery, exposing producers to volatile crude prices.

But the department is not using those new fixed-price contracting authorities. The latest solicitation specifies that it will buy oil at a price "determined by the average (to the $0.001) of daily settlements for the NYMEX WTI ... prompt delivery month contract for the three trading days commencing with the day of notice of award," with some adjustments.

More purchases to come

The solicitation is part of the Biden administration's three-part SPR replenishment plan, which centers on "direct purchases with revenues from emergency sales, exchange returns that include a premium to volume delivered, and securing legislative solutions that avoid unnecessary sales unrelated to supply disruptions so as to strategically maintain volume," the DOE said in a press release.

Through the omnibus spending bill that funds the government through fiscal 2023, Congress canceled 140 million barrels of congressionally mandated SPR sales that were to take place between fiscal years 2024 and 2027. The DOE requested the move to give it more flexibility as it looks to prioritize replenishing the SPR, but it was carried out by transferring billions in revenue from the 180-million-barrel drawdown to congressional coffers.

The department, however, had to conduct one congressionally mandated sale of 26 million barrels this year, which is underway with deliveries to be completed by the end of June.

The DOE said May 15 that it "intends to purchase more oil later this year."

ClearView analysts held to their forecast that the department would make no more than 10 million barrels of purchases by the end of the year over and above the May 15 volume. "Although we would not rule out other apparently opportunistic buys, we do not expect big ones," they said.