US mulls large SPR release

Edward Bell - Senior Director, Market Economics
Published Date: 31 March 2022

 

The US administration is reportedly considering releasing as much as 180m bbl from its strategic petroleum reserve, the largest release of the stockpiles since the SPR was established during the 1970s energy price shock. The proposed release follows on from two other draws in the last six months; of 50m bbl in November 2021 and 30m bbl in March 2022, both in coordination with other major consuming nations.

Depending how quickly the stockpiles are released onto the market they could represent around 1m b/d of additional supply for several months to help compensate for the relative inaccessibly of Russian crude as bilateral, multilateral and self-imposed sanctions by firms prevent dealing in cargoes from the country. The proposal also comes just ahead of today’s OPEC+ meeting where the producers’ alliance is expected to proceed with its modest monthly production increase of slightly more than 400k b/d. That the US can consider adding such a sizeable amount to markets may affirm the view of OPEC+ ministers that oil market conditions do not warrant additional output from them at this point.

The US currently holds around 568m bbl of crude oil in its strategic reserves, distributed across caverns in Texas and Louisiana. At present levels of implied demand, the SPR would account for around 28 days’ worth. That is substantially lower than the blowout in inventories that resulted from the precipitous drop in demand during the Covid-19 pandemic but is also substantially lower than historic levels of around 35-40 days-worth of demand. When including commercial stockpiles, the inventory position of the US still appears relatively flush at around 50 days’ worth of demand.

Inventories measured against implied demand

Source: Bloomberg, EIA, Emirates NBD Research

An SPR release is not without its risks. In the first instance it may not be substantial enough to materially lower prices, particularly for gasoline prices in the US which have a closer link to international oil benchmarks than to domestic ones. Secondly, running down inventories when the oil market may be moving into a structural deficit with no certainty on how or when stockpiles can be replenished could add another supporting force to oil prices in the medium term. Even if extended over a six month period, which would mean around 1m b/d of additional ‘supply,’ the SPR release wouldn’t be enough to compensate for what is appearing to be a material disruption to Russian crude flows.