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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The Problem With Refilling The Strategic Petroleum Reserve

  • The Department of Energy has added a mere 5 million barrels to the reserve thus far this year.
  • Buying crude been hampered by an ongoing modernization effort at the SPR dubbed Life Extension 2 program that aims to improve operational integrity. 
  • The Biden administration will have to buy at a significantly higher price than the level it has said it would trigger purchasing action.
SPR crude

Last year, the Biden administration conducted the largest ever sale from the Strategic Petroleum Reserve (SPR) to the tune of 180 million barrels, in a bid to stabilize soaring oil prices in the aftermath of Russia's invasion of Ukraine. The administration set a target to start refilling the reserve once oil prices dropped to $70 per barrel but later the department announced that it hopes to sign purchase contracts for the oil at $79 a barrel.

But with WTI trading in the low to  mid-80s with prospects for another oil price rally as supply tightens, the volume of oil sitting in the reserve’s underground salt caverns in Texas and Louisiana has continued to sink and touched levels last reached in 1983. Indeed, the reserve held only 351 million barrels of crude as at Oct. 27 after another 20 million barrel drawdown in the current year, eliciting fresh concerns regarding the country’s energy security. And now some industry watchers are charging that the administration is dragging its feet on the matter.

I don’t think they have any sense of urgency. Why in God’s name did the Department of Energy not sell at 100 and then buy at 70 when they had the opportunity to?” Ed Hirs, energy fellow at the University of Houston, told Yahoo Finance in a recent interview.

The Department of Energy has added a mere 5 million barrels to the reserve thus far this year, way too little given the magnitude of the shortfall. But the government has defended itself saying it has been grappling with a significant logistical hurdle to the replenishment. First off, it had to first complete congressionally mandated oil sales first imposed back in 2015 that had threatened to drain an additional 140 million barrels in the coming years to fund road maintenance and budget shortfalls, something it only managed to accomplish in March this year. Related: American Refiners To Lower Utilization Rates As Gasoline Demand Cools

It's a pipeline, so it has to go one direction,” a DoE official has told Yahoo Finance

Second, the exercise has been hampered by an ongoing modernization effort at the SPR dubbed Life Extension 2 program that aims to improve operational integrity. 

But the DoE is now saying that purchases should proceed smoothly henceforth.

However, the Biden administration will have to buy at a significantly higher price than the level it has said it would trigger purchasing action. Further, any buyback programs would have to be carefully coordinated to prevent price hikes. 

This brings us back to Standard Chartered’s report earlier this week noting that $98 oil is quite well supported by supply and demand fundamentals, with expectations that global demand will grow by 1.5 million barrels per day (mb/d) in 2024, with non-OPEC supply adding 0.88mb/d led by the US, Canada, Guyana and Brazil. StanChart also predicted supply deficits in Q1 and Q2 that will eventually give way to a mild surplus in H2, with OPEC’s aim of stabilizing prices in an acceptable range is likely to continue, potentially leading to a further tightening of fundamentals in 2025.

That said, the government would have little trouble finding enough oil to refill the SPR: U.S. crude oil production has surged to an all-time high of 13.2 million bpd. 

There is little doubt the U.S. Shale Patch is largely responsible for keeping oil markets well supplied and oil prices low: Rystad Energy  has estimated that whereas OPEC and its allies have announced cuts amounting to ~6% of 2022's production, non-OPEC supply has made up for two-thirds of those cuts, with the U.S. accounting for half of that.

New Defense Bill Blocks SPR Sales

Back in July, the United States’ Senate passed an amendment to the annual defense bill that will prohibit China from purchasing oil from the United States’ emergency stockpiles. Voting overwhelmingly in favor of the bill, 85 to 14, the amendment will now be added to the National Defense Authorization Act (NDAA), which is poised to be passed later this year. 

Co-sponsored by Democratic Senator Joe Manchin and his Republican counterpart Ted Cruz, the amendment aims to restrict sales of U.S. oil from the Strategic Petroleum Reserve (SPR) to companies under the control of the Chinese Communist Party. The bill also bans the export of crude oil from the SPR to China. 

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Its passage signified a significant shift in the country’s energy policy and could have significant implications for global oil markets. For starters, it would make it harder for other countries to fully cooperate with the U.S. in coordinating their SPR releases whenever oil prices spike. 

In 2021, the Biden administration reached out to several countries including China, India, South Korea and Japan, urging them to synchronize the release of crude from their Strategic Petroleum Reserves (SPRs) in a bid to lower global energy prices.

By Alex Kimani for Oilprice.com

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Leave a comment
  • fredric longabard on November 09 2023 said:
    Stopping China from buying oil from the SPR is silly as oil is an international commodity and priced accordingly. The only way is to stop selling that oil to anyone. Politicians, yuck!
  • Billyjackeng Jackson on November 09 2023 said:
    The SPR is a government run project so it is rife with incompetence and corruption.

Leave a comment




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