US DOE announces next SPR sale, sheds light on plan to replenish reserve

The US Department of Energy announced July 26 its fifth sale as part of the largest-ever Strategic Petroleum Reserve drawdown aimed at reining in gasoline prices, and also shared details of its plan to replenish the SPR with a proposal that would afford DOE more buying power in the future.

The US will release up to 2.8 million barrels of sour crude and 17.2 million barrels of sweet crude between Sept. 16 and Oct. 21. Bids are due by 10 am CT Aug. 2, and contracts will be awarded no later than Aug. 11, the department said.

The DOE is offering up to 7.6 million barrels from Big Hill in Texas, 9.6 million barrels from West Hackberry in Louisiana and 2.8 million barrels from Bryan Mound in Texas.

The sale continues President Joe Biden's historic commitment to release 180 million barrels, or roughly 1 million b/d, from the SPR from April through the end of October. More than 125 million barrels have already been sold, of which nearly 70 million barrels have been delivered, to help mitigate global oil supply disruptions caused by Russia's invasion of Ukraine and help lower energy costs.

SPR release impacts

Biden administration officials on a call with reporters July 26 described the emergency releases as "a supply lifeline for oil and refining companies and in turn a lifeline for American consumers," as the oil industry works to boost production after pandemic-induced declines.

They noted that US gasoline prices have fallen for six weeks in a row by nearly 70 cents/gal from their June peak.

According to a new analysis from the Treasury Department, the SPR releases, along with an additional 60 million barrels released by international allies and partners, curbed prices at the pump by as much as 42 cents/gal, compared with where they may have soared absent the releases,.

Treasury's analysis used a range of estimates on market responsiveness included in energy economics literature to make assumptions on how the market would have looked without the SPR and international releases.

One approach found that flowing crude from the emergency stockpiles likely lowered the price of US gasoline by 17 cents/gal to 42 cents/gal, with an alternate approach suggesting a point estimate of 38 cents/gal, Treasury said in a statement.

SPR replenishment

The Biden administration July 26 also took steps to ease efforts to refill the emergency oil stockpile, detailing plans to allow fixed-price forward purchases of crude oil. The move builds on a May announcement to buy back 60 million barrels of crude for the SPR — or one-third of the massive drawdown — at lower prices in the future.

"Just as we've been methodical in the decision to drawdown from the SPR, we are similarly strategic in replenishing the supply so that it stands ready to deliver on its mission to provide relief when it's needed most," an administration official said.

Current regulations allow the DOE to enter into contracts for future delivery of oil for the SPR but tie the price of those purchases to a market index at the time of delivery, exposing producers to volatile crude prices.

The DOE intends to issue a notice of proposed rulemaking that would give it the option to pay a fixed price at the time the transaction is executed, the White House announced.

"That sounds technical, but what it means in practice is that producers would have more certainty about future demand for their product and that would encourage investment in production today," an administration official said as the White House continues to push for a short-term production boost to counter the instability and uncertainty inflicted by Russian President Vladimir Putin.

Because replenishment of the SPR would begin well into the future, likely after fiscal year 2023, those repurchases would not compete with demand for barrels in the near term, the official added.

A competitive, transparent fixed price would also provide certainty to the government that the SPR is being replenished at a fair price, the official said.

Prices still high

Though gasoline prices have eased the White House acknowledged that they are still too high, and crude prices remain near or above $100/b.

A weakening US economic outlook and concerns about interest rate hikes against reduced Russian gas flows into Europe faded bullish sentiment in early US crude futures trading July 26. At 1613 GMT, ICE September Brent was down 99 cents at $104.18/b, while September WTI was $1.64 lower at $94.98/b.

Work continues towards garnering global support for a price cap on Russian oil, which US Treasury Deputy Secretary Wally Adeyemo recently said he hoped could be executed by December in conjunction with the EU's plan to prohibit operators from insuring and financing seaborne transport of Russian oil. Treasury officials have said that the price cap would deny Russia the revenue needed to fund its war machine while keeping global oil prices in check.

The administration official said that the White House is also engaging with the oil industry to find ways to expand refining capacity and continues to call on Congress, states, oil companies and retailers "to all do their part to mitigate Putin's price hike."

Biden has taken a harsh tone toward the oil industry, accusing the industry of lavishing in record profits while American families struggle to keep up with soaring prices at the pump. The industry has shot back that Biden's policies have hamstrung production and led to refinery closures.

The American Petroleum Institute and the American Exploration and Production Council July 26 released a study on the economic benefits and cost reductions seen since Congress lifted a US crude export ban in December 2015. Both groups have criticized the Biden administration for considering limits to US oil exports to curb high fuel prices.

US Energy Secretary Jennifer Granholm in December said such a drastic move was no longer under consideration, but in May indicated that it was back on the table. Analysts have said they do not expect any such policy changes as long as the Russian energy crisis looms.

The API-AXPC study, conducted by ICF International, found that enabling open markets increased oil and natural gas development in the US, reducing global oil prices by $1.93/b over the six-year period and adding $161 billion to the US GDP.