WTI (Western Texas Intermediate) has recently break through the resistance of the $79 to $80 range. Although it is still too soon to discuss whether this is a shift from a cycling oil bull towards a structured bullish trend, the fear of inflation has been a hot topic for world leaders. Economists and exports have downgraded economic growth around the globe.
Over the weekend, Goldman Sachs downgraded the US economy again, expecting the economy to expand by 5.6% in 2021, compared to a previous estimate of 5.7%. In 2022, growth is projected to expand by 4%, down from 4.4% as crude prices remain at a 7-year high, over $80 a barrel. Recently, The U.S. Department of Energy (DOE) floated the idea of using the SPR (Strategic Petroleum Reserve) to combat high oil prices at home. Goldman Sachs estimated about 60 million barrels of oil can be released from the SPR but expected the effect to be moderate for the oil market. Historically, there are few times that SPR was used in large quantities to combat emergency situations.
In 2005, due to the damaging effect of Hurricane Katrina, President Bush authorized the use of SPR to combat shortfalls of oil supply. The strategy only worked briefly as renewed tension in the Middle East, as well as strong demand growth in emerging countries lead to WTI crude price climb to a historical high at 147.27 in July of 2008.
And in 2011, President Obama ordered the Department of Energy to release 30 million barrels of oil from the SPR amid the disruption of oil supply in Libya. While briefly, WTI (Western Texas Intermediate) crude dropped from $113 in April to $80 in September, the move was largely effective only for a short period of time. By the 4th quarter of 2011, the global inventory draws expanded from 151,000 barrels in the 2nd quarter to 601,000 barrels, the price was back to $100 in the first quarter of 2012.
While President Obama utilized the same strategy in 2012, the crude price dropped to $84 over the summer before it recovered back to $100 a year later and the price has been stable until 2014. On the other hand, US oil production has been the main driving force behind the build of inventory, rising over 3 million b/d from 2011 to 2014 which triggered the price war with OPEC in the second half of 2014, causing the oil price to crash.
While Goldman Sachs only sees a difference of $3 in crude price following the news of possible SPR releases from the Department of Energy, the near-term impact can be very large. 60 million barrels of oil is a still much larger quantity comparing to what has been done historically, it equals to 5 months of consecutive oil production increases by 400,000 barrels per day. While it still depends on the time of releases, it will present a shock to the oil market in short term.
However, what is not considered here is that US oil production on a weekly average is only on par with the production at the same period in 2018, while the monthly average is even below at the same period in 2018. If price experiences drastic volatility, it will do more harm to the supply than the demand as shale producers are more cautious about production growth this time, as well as OPEC’s reluctance to increase production. In the best scenario, it is a short-term fix to delay oil price surging, but it does not change existing inventory.
Another problem with using SPR as a final resort is that it is down over 100 million barrels since the start of the decade, the White House would also need to fund budget bills from 2015 and 2018 during fiscal 2022 using SPR, which begins on October 1st. Another 30 million barrels starting 2023, and 159 million barrels from the SPR will be released into the market between fiscal years 2024 and 2027.
The massive infrastructure package being debated on Capitol Hill could trigger another 88 million barrels of SPR sales between fiscal 2028 and 2031. All these numbers added together are enough to cut the reserve in half by the next decade which could make the US government vulnerable in dealing with any emergency situations forward.