Listen: The price of delaying the US' Strategic Petroleum Reserve refill

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Jeff Mower:

Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights. Today we'll be talking about a recent stall in the Biden administration's plans to refill the strategic petroleum reserve with crude and what that could be for prices and policy heading into the US presidential election.

I'm Jeff Mower, director of Americas oil news, and I'm joined today by senior policy reporter Eamonn Brennan in Washington DC, and oil futures reporter Chris van Moessner in New York. Welcome, guys.

The Department of Energy on April 3rd said was no longer looking to buy up to 3 million barrels of crude for delivery in August and September to refill the SPR. The refills were planned following the historic release of 180 million barrels of crude by the Biden administration. Shortly after Russia's invasion of Ukraine. The DOE made the decision as oil prices have jumped recently with WTI at roughly $85 a barrel and Brent at 90. So, Eamonn, I want to go to you first. Why did the Biden administration stall the refill? Was it just price driven? And maybe you could start by giving us a bit of history on this historic 180 million barrel release.

Eamonn Brennan:

Sure. So that came in 2022 not long after Russia's invasion of Ukraine and associated price spikes in the oil market, and was seen as a way for the Biden administration to keep US oil prices reasonable levels after they rose really quickly. It was generally successful in doing so. Prices leveled out and then fell and have stayed relatively to that period of time, low. They sold, and this is something the Biden administration talks a lot about, every press release they mentioned that they sold this oil at $95 a barrel, and prices have been lower since then. And so since late 2022, early 2023, the administration has been attempting to refill the SPR and buy back some of those barrels that they sold at lower prices, which they have been eager to discuss and note at every turn. And those purchases started at a relatively moderate pace in late 2022 and 2023.

And then the scheduled purchases for 2024 have been every month at essentially the maximum. And every press release, as I mentioned, has been very excited to note the prices being well below $95 a barrel, below the Biden administration's own sort of self-imposed limit of $79 a barrel, noting over and over again the great deal for the taxpayer that the administration is getting by making these purchases at these prices.

But with prices rising recently, the speed of the refill relative to the Biden administration's own sort of self-imposed limit of 79, they had one refill that they agreed to that it was $81 a barrel average, which I asked for comment about this at the time, and they started to focus on the average price of the refill throughout the entirety of the past year and a half or so, kind of ignoring that $79 a barrel limit. And then with prices rising even further, two scheduled purchases, solicitations were canceled before producers had a chance to bid on them. So clearly rising prices in the past month, several weeks relating to not only the global oil market just generally, but also tensions in the Middle East and potential issues with Russia and Ukraine have caused the Biden administration to not be able to purchase at the price that they've been touting for 18 months.

Jeff Mower:

Now, did they say when they announced the stall, they didn't say anything like, "Well, we're going to wait for prices to drop to resume these purchases again."

Eamonn Brennan:

What they said to our colleague, Jasmin Melvin, who wrote our story was, and this is a quote, "Keeping the taxpayer's interest at the forefront, we will not award for the Bayou Choctaw SPR site in August and September." That was the scheduled purchases that were canceled. "And we'll continue to solicit available capacity as market conditions allow. As always, we monitor market dynamics to remain nimble and innovative..." And yada yada.

So no, they didn't say they'll stop. They didn't say we will be back at it next month. I think it is really just a very price sensitive thing and as we've seen, they've been very eager to refill as quickly as possible throughout the past year and have kind of now run into a wall where the prices that they've been talking about no longer make a lot of sense.

Jeff Mower:

So Chris and Eamonn, you mentioned that the release was effective in pushing prices lower, but I think there were other factors there, too. I don't know. Chris, what do you think? I know it's always hard to tell when you're looking at prices, considering all of the policy or economic issues or micro or macro that can move prices around. What do you think about that as far as the price reaction following the initial SPR sale?

Chris van Moessner:

Yeah, it's undeniable. The prices did fall following the sale. Like you said, it's a little hard to parse out the impact of the sale, how much of that fall is due to the impact of the sale. It's kind of an unprecedented use for the SPR, which is as the name implies, is a strategic reserve.

And more traditionally, the SPR has been used to stop gap temporary shortfalls in supply. Something like hurricanes knock out supply and it keeps the refineries running. So this maneuver to influence global oil prices is something that really hadn't been done before. And so at the same time as you see this sort of flood of oil, US barrels, into the market, the US Federal Reserve is also jumping interest rates to tackle this huge inflation surge we saw in 2022. We mentioned the Russian invasion of Ukraine, and early on in the early days of the war, there was a lot of concern that Russian exports would drop off leaving a huge gap in global supply. And that didn't really come to fruition in the way that everyone kind of thought it did. There's a lot of Russian crude still on the market in a lot of different forms.

So it definitely, I would say, it played a role in reducing prices, but it wasn't the only factor that brought us back down to earth in the back half of 2022.

Jeff Mower:

Now, fair enough. You're right. Yeah, looking at those Russian flows, they're ready to continue. And we did get the price cap put on Russian crude. I'm not sure what the latest is on Russian crude exports, but I think that the biggest concern or the bigger concern right now is Russian refined products exports because of these recent attacks on Russian refineries.

But that being said, how much crude do we even need in the SPR? I was thinking about that this morning. How prepared are we now? Colorado State University came out earlier this month and issued their highest prediction for Atlantic hurricanes in their April forecast. They said were supposed to have a lot of named storms this year, kind of mimicking what we saw in, I believe, 2022. That being said, we had a lot of named storms in 2023. Right? You can have a very active hurricane season without having many storms hit landfall. So I'm curious about the use of the SPR during hurricanes, and well again, just what this looks like in particular for the Biden administration or for Biden heading into his reelection campaign with the election coming up in November.

Chris van Moessner:

It's a really good question, how much oil do we need to have on reserve? There's still about 450 million barrels in reserve right now, and that's about 30 days supply for all of US crude consumption. And we think about something like a disruption of a hurricane. That obviously isn't taking out... But it's a very devastating but somewhat localized event, right? It's not going to take out every refinery in the country simultaneously, so you don't need to replace that entire daily supply of crude. You're really, really looking at kind of filling, backstopping these somewhat temporary disruptions. Right.

Jeff Mower:

Before we continue, I want to take a moment to tell you our listener about some new refined products price assessments we launched this month. On April 1st, Platts launched gasoline, diesel and jet fuel cargo prices delivered in Florida. As Florida's population has increased, so has its demand for refined products. However, the state is isolated from the rest of the country as there are no major refined products pipelines into the region. Also, Florida has no refineries, so the state depends on supplies from US Gulf Coast Refiners via Jones Act vessels, and from refiners overseas. Now these new assessments reflect waterborne delivery into Port Everglades in Tampa. If you'd like to learn more about these Florida assessments, be sure to check out the link we've included in our show notes.

Chris van Moessner:

And you kind of think of maybe a worst-case scenario in Hurricane Katrina in 2005. That drew down 20 million barrels from the SPR. The world's a very different place in 2005. The US production was a fraction of what it is now, but it was a lingering, a very long-winded, I think. US production fell from four and a half million barrels per day to 3 million barrels per day following the storm and didn't recover for a full year, which is a pretty big impact. And that only needed 20 million barrels released from the SPR to backstop. So I wouldn't go so far to say that I know the answer to how much is enough supply, but it seems like that you could accomplish, if the goal is to backstop these temporary disruptions, 450 million barrels seems sufficient to do that.

Jeff Mower:

No, that's a good point considering that inputs are roughly unchanged at around 16 million barrels a day. I know they fluctuate depending on refinery maintenance, but refinery inputs haven't changed that much since Katrina. But lower 48 production is now at close to 13 million barrels a day at 12.7 million barrels a day, quite a lot more. US Gulf production offshore is about two. I want to say a little under 2 million barrels a day. So I just think that made up such a higher percentage of US crude production back in 2005 when Katrina hit.

Chris van Moessner:

And then on the other hand, you have this idea of the SPR is being reserve as a source of last resort almost if the worst should happen. Right? And there's a lot of risks out there in the world, energy, political risks we're talking. A lot of tension in the Middle East. It's not inconceivable that you could see disruption as the crude flow is coming out of the Middle East specifically. And something that you would want to have this reserve back home, so to speak.

But even now, you see back when the SPR was first initially conceived, it was in the post oil crisis in the seventies, but now you see this sort of reliance on OPEC is becoming less all the time. As you see the surging output in Brazil and Guyana, our reliance on OPEC is maybe becoming less singular as the non-OPEC sources grow.

Jeff Mower:

Where does that leave, for Eamonn and Chris really, where does that leave Biden heading into the November election? What tools does he have? Let's say there was a big disruption and Biden's going to be concerned about gasoline prices. Any president is heading into an election, right? Crude could hit... Crude at 85 may not be such a big deal right now, but gasoline is still below, what? $4 a gallon. Once you start seeing those gasoline price stores in the general press, that's when politicians start getting concerned, I would think. And there's not a lot of tools left, right? It's like, well, you can release more crude from the SPR, but if you have refining capacity damaged, that extra crude isn't going to do much for you. I don't know. What do you think? Is there maybe the easing of what's been done before during emergencies? The easing of gasoline specifications is one option?

Eamonn Brennan:

Yeah, there aren't a lot of tools really left in the toolbox. I know the CEO of Hess at CERAWeek a couple of weeks ago talked about we should be refilling the SPR at a rate of 500,000 barrels per day. But Deputy Energy Secretary David Turk in December gave an interview in which he made it pretty clear that the rate that it's being refilled at, and has been refilled at for the past year with all these scheduled purchases and solicitations, is about as fast as it's practically possible to go. So there isn't a way, or hasn't been a way for it to ramp up and more rapidly refill the SPR.

So yeah, the Biden administration is now in a situation where if there is the kind of spike that you saw that caused this drawdown, this really large and pretty unprecedented drawdown initially, could they get away with something similar, just in terms of the politics and perception of it? High gas prices are probably worse perception wise for any politician, but the SPR has been a thing that Republican politicians have talked about and probably would definitely talk about if it became a matter of national security or a feeling that the US had really sort of dwindled, whatever production levels are at the stuff that's going to hit the sort of mainstream voter.

If those people feel like suddenly the US is energy insecure and it's something that the Republican presidential candidate can get out there and say, "We sold all our oil and we don't have any oil anymore, and that's why gas prices are so high." That whole thing would feed into a narrative that would be probably pretty damaging, even if most people aren't paying attention to the level that the SPR is at. The entire sort of narrative of this summer coming into election in the fall could be potentially damaging for Biden and without really too many places to go in terms of refilling it, given what prices are and what the administration wants to refill at versus the ability to draw any more down than they already have, which would be a difficult thing to do.

Jeff Mower:

Yeah, I imagine there might be some talk of, it happens every once in a while, of banning exports. Occasionally get that, "Hey, we should halt crude exports or refined products exports." Although I also think if you had a serious disruption of crude supply in the US that the export arbitrage would probably narrow anyway to the point where exports wouldn't be that economical. And the same with refined products. Not to mention, I guess you ban those exports, you're stuck with a lot of light sweet crude that's being exported, really, that isn't of much use to a lot of refiners in the US that need the heavier stuff.

Chris van Moessner:

Yeah, to add to that, I think the White House has a lot of good tools to help alleviate this sort of localized severe price disruptions. Like you mentioned, changing the gas and specs or Jones Act waivers to be able to move barrels faster within states. Like Eamonn mentioned, politics is a lot about perception. So if there becomes a narrative that it doesn't seem like the White House is doing enough, quote unquote, to lower prices, right? They might see pressure to act in a more strategic way like releasing the SPR, but like we said before, the actual price impact of releasing those barrels, it is not very clear. So even doing that action, that in and of itself requires a bit of politics to sell it. I would say, not only are you trying to help lower prices, but that it's actually being effective. Right.

Eamonn Brennan:

I would say one of the things that my reference to that earlier was kind of sort of the Biden administration line on that. They've been very happy to claim that it did affect prices and that it was this big sort of savvy success and this sort of bold use of American resources. And then very happy to note over and over again the discounted prices at which they were buying back the energy. But yeah, the point is probably now that they're in a bit more of a bind where that narrative maybe wouldn't be quite so effective. And as you said, there's no guarantee that any sort of further drawdown would even lower prices or that was the cause of those lower prices in the first place.

Jeff Mower:

All right, thanks so much guys. I'm going to leave it at that. And yeah, thanks Chris and Eamonn for joining me. And thanks again to our listeners for tuning into this episode of the Platts Oil Markets podcast. This episode was produced by Jennifer Pedrick in Houston.