DOE to sell 1 million barrels of gasoline as it prepares to close Northeast reserve

The Department of Energy May 21 took the first steps to shutter a regional gasoline supply reserve, as mandated by Congress, saying the timing of its solicitation to liquidate the reserve's 1 million barrels of gasoline would help lower prices at the pump as the summer driving season kicks off.

The Northeast Gasoline Supply Reserve has long been seen as inadequate to address severe supply disruptions along the US Atlantic Coast where demand outstrips local supply, making the region vulnerable to supply shocks.

Congress in March passed an appropriations package funding the DOE and other agencies through fiscal year 2024 that included language mandating the closure of the reserve and for proceeds from the sale of the stockpiled 1 million barrels, or 42 million gallons, to be deposited into the US Treasury.

The DOE's solicitation seeks to maximize impacts on gasoline prices by delivering gasoline supplies to awardees, likely retailers and terminals, no later than June 30, the department said.

"By strategically releasing this reserve in between Memorial Day and July 4, we are ensuring sufficient supply flows to the tri-state and northeast at a time hardworking Americans need it the most," Energy Secretary Jennifer Granholm said in a statement.

US auto club AAA projected 38.4 million people will travel by car over the Memorial Day weekend May 23-27, marking a 4% increase from last year which would be the highest number of drivers for the holiday since the association began tracking in 2000 and could drive more demand for gasoline.

Gasoline inventories

US Atlantic Coast gasoline stocks stood at 55.5 million barrels in the week ended May 10, putting inventories 7.4% behind the five-year average but still around 6% above year-ago levels, according to the latest US Energy Information Administration data.

Tim Evans, independent analyst at Evans on Energy, noted that the addition of 1 million barrels into commercial gasoline inventories from the reserve "would increase the year-on-year surplus to 4.2 million barrels (8.0%) and reduce the five-year average deficit to 3.4 million barrels (5.7%)."

"The added cushion of commercial inventories is bearish for the market at the margin," Evans said May 21. "At the same time, it's worth bearing in mind that the extra supply is the equivalent of 1,000 futures contracts, a volume that might be easily absorbed. This is also a one-time transfer and not a source of ongoing supply."

Current USAC inventories are well below capacity. According to the EIA, the USAC has 83.2 million barrels of working gasoline storage capacity.

A market source concurred that not a huge market volume is in play but said that every little bit could help. "It's probably not a ton," he said. "But election year always gets wacky."

Offers of at least 100,000-barrel minimum quantities are due by 11 am CT May 28, according to the solicitation. The gasoline will be sold from the NGSR's Port Reading, New Jersey site, which is holding 900,000 barrels of RBOB gasoline; and its South Portland, Maine site, where 98,824 barrels of CBOB gasoline is available.

The announcement itself appears to have had little impact on the gasoline market. New York gasoline barge prices were unchanged and little traded by midday May 21.

"There's steady demand and lower prices," one East Coast trader said, adding that the local gasoline market just seemed to take the lead of global crude changes.

Provokes retailers' concerns

The NGSR was created in 2014 following the havoc wreaked on gasoline markets two years prior from Superstorm Sandy, but it has yet to be used.

The US Government Accountability Office in 2022 concurred with the DOE's 2020 assessment that the reserve was too expensive to maintain and too small relative to regional fuel demand. The 1 million barrels of fuel in the reserve would satisfy less than two days of estimated consumption in the Northeast, while the operations and maintenance of the NGSR cost on an annual basis about $13/b, compared with just 30 cents/b to maintain the emergency crude supplies in the Strategic Petroleum Reserve, the GAO said at the time.

However, New Jersey fuel retailers have expressed concern that the elimination of the reserve jeopardizes the state's energy and economic security.

New Jersey Gasoline, C-Store, Automotive Association Chief Administrator Eric Blomgren argued earlier in the year that even though the reserve has not been used "so far," its closure leaves the state's gas stations with no emergency supplies when the next disaster hits. There are no "projections for the future that call for lower sea levels and weaker hurricanes."