US to complete 180-million barrel SPR drawdown, lay out plan to replenish oil reserve

The US Department of Energy will issue a notice to sell up to 15 million barrels of crude from the Strategic Petroleum Reserve Oct. 19, completing the largest-ever drawdown from the emergency stockpile, and finalize a plan to giving it more buying power to replenish the SPR in the future, senior Biden administration officials said Oct. 18.

The DOE is offering up to 3 million barrels of sour crude and up to 12 million barrels of sweet crude from Big Hill and Bryan Mound in Texas and West Hackberry in Louisiana for delivery in December. Bids are due by 10 am CT Oct. 25, and contracts will be awarded no later than Nov. 1, the department said in a press release.

The sale wraps up 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. Some 165 million barrels of crude have already been delivered or committed for delivery under the release to help mitigate global supply disruptions caused by Russia's invasion of Ukraine and help lower energy costs.

Price impact

Oil futures climbed following the announcement of the release, with NYMEX front-month crude trading $1.18 higher at $84.00/b late Oct. 18. NYMEX crude had settled down $2.64 at $82.82/b prior to the announcement, in part on expectations that an SPR release was in the works.

"How effective the SPR release will be may well depend on whether other [countries] join as we saw earlier this year ... At the time, oil was trading at much higher levels, well above $100/b," Craig Erlam, OANDA's senior market analyst said in an Oct. 18 note.

Gasoline prices have fallen about $1.15/gal from their peak in June.

"At current prices, the average driver will spend about $60 per month less than they would have if [gasoline] prices had stayed at that peak level," a senior administration official said on a call with reporters Oct. 18.

Biden is expected Oct. 19 to also reiterate his call for the oil industry to do its part to address the pain at the pump exacerbated by the Russia-Ukraine war.

"The profits that energy refining companies are now capturing on every gallon of gas is about double what it typically is at this time of year, and reseller margins over the refinery price are more than 40% above typical level," the administration official said, contending that these record profits have kept pump prices higher than they should be as oil prices have come down.

"Tomorrow the president will reiterate that outsized profit margins are inappropriate, especially at a time of war, and will call on companies to pass their savings through to consumers," the official said.

Refilling the SPR

The DOE will also formally announce Oct. 19 "its intent to do the SPR repurchases to add to global crude oil demand at times when WTI crude oil is at or below $67/b-$72/b" in order to protect taxpayer interests and encourage more near-term production, a second senior administration official said.

"We think that's an important signal for producers that the SPR will be part of helping to moderate and stabilize price flows not only when prices are going high but when prices are going low, and using the SPR in that responsible manner," the second official said.

The Biden administration also took steps to ease efforts to refill the emergency oil stockpile, with 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.

The DOE announced late Oct. 18 that it had finalized a first-of-its kind rulemaking that gives the department the option to pay a fixed price at the time a transaction is executed. Current regulations allow the department 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.

Even with the massive drawdown from the SPR and plans to refill the stockpile pushed out to the future, the senior administration officials asserted that the US remains prepared to undertake additional SPR sales this winter if needed to counter any Russian or other actions disrupting global oil markets.

Work continues towards finalizing the G7's implementation plans for a price cap on Russian oil that is slated to take effect in conjunction with the EU's plan to, as of Dec. 5, 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.