Market focus on, and narrative around, the possible release of crude oil from the US Strategic Petroleum Reserve (SPR) has been a key driver of recent crude market weakness. Prompt WTI is now closer to $75.00 than multi-year highs last month just north of $85.00 per barrel. The new twist this week is a possible joint SPR release effort by the US, China, and possibly others to tamp down global oil prices. Soaring retail US gasoline prices in the run-up to a midterm election is a particularly ominous problem for any US president. President Biden is further hemmed in by his ambitious goals on carbon neutrality and needs to appease the progressive wing of his party.
Recent research from Goldman Sachs suggests the US is likely to release at least 20-30 million barrels of crude from the SPR. News reports this week suggest China and other nations (India, Japan, South Korea) may release another thirty million barrels on top of the US volumes.
Perspective is important here. Extra crude in no way addresses the acute shortage of BTUs for power generation in global energy markets at present. Likewise, SPR volumes do not directly address tightness in US gasoline and/or global diesel markets. Persistently high refinery crack spreads tell us refiners are struggling to make enough product. That is reinforced by steadily declining fuel inventories, already well below the five-year average worldwide.
Already factored into prices
In testimony before the Senate last week Stephen McNally, acting Deputy Director of the EIA, said “Ultimately the amount of impact would be relatively short-lived and would depend on how much was released.” He cited an EIA analysis which showed that a release of 15 – 48 million barrels from the reserve could bring prices down about $2 a barrel and push gasoline prices at the pump down about 5 – 10 cents per gallon for a brief period of time.
Another key caveat is that China already began an SPR inventory release program earlier this year with twenty million barrels. Up to fifteen million more barrels are on the schedule before year-end. Thus, China’s contribution is already “cooked into the books” so to speak.
A new coordinated release of thirty million, or even sixty million barrels, would also fall short of market expectations centered at one hundred million barrels. Likewise, all of the above is largely factored into prices at this point given the $10.00 WTI price pullback that has already occurred. The threat of an SPR release, coordinated or otherwise, has already “achieved” more in the market than its fundamental impact would imply. Thus, at this point, any “market surprise” is more likely to be bullish than bearish.
On Nov 12th, the US SPR held 606.1 million barrels of crude in inventory across four salt cavern storage facilities along the US Gulf Coast. These include Bryan Mound, TX (Capacity 254 million barrels), Big Hill, TX (160 million barrels), West Hackberry, LA (227 million barrels), and Bayou Choctaw, LA (seventy-six million barrels). Sweet and sour crude are segregated by facility and cavern. The maximum designed surge drawdown rate is just over four million BPD, but it is thought to be materially lower at present given the infrastructure is more than forty years old and suffered from extended periods of reduced or deferred maintenance.
China does not disclose its SPR capacity, but industry estimates are between four hundred million and five hundred million barrels. Unlike the US SPR, China has refill timing requirements that means these barrels released now will need to be replaced in 2022, Chinese releases merely defer demand.