Over this Tuesday, the White House announced a report detailing a coordinated Strategic Petroleum Reserve (SPR) release with other Asian countries to combat inflation, and high energy prices around the world, in response to OPEC’s refusal for extra production increase. In total, an additional some 120 million barrels of oil would flood the market in the next few months.
According to the White House Press Release, the Department of Energy will draw 50 million barrels from the SPR in two ways, 32 million barrels will be be exchanged over the next several months, but will have to be purchased back in the future years to refill the reserve. Another 18 million barrels will be an acceleration release in the next several months that Congress had previously authorized for budget funding in the past.
Certainly, 50 million barrels for the US and over 100 million barrels for the world sound a lot. It is not quite enough in reality to contain the global energy crunch. For an example, the world oil market currently faced over 2 million barrels of deficit from third quarter according to OPEC’s monthly report, 120 million barrels from SPR can only fill in that gap for 2 consecutive month. If winter became more drastic or any snow hazard that shut in productions from one particular region, this could trigger further disruption towards global oil supplies, potentially retaining the current deficit in the coming year.
Meanwhile, according to the Wall Street Journal, two large oil producers from OPEC+ have indicated they are considering pausing December’s oil production increase to offset the supply increases from SPR. Although other nations have not yet to join the conservation yet, OPEC’s pause of oil production growth by 400,000 barrels per day for 3 months, would destroy the effort of this joint SPR release and could backfire later.
This year, cold weather has hit Europe and Asia very early, China, Japan and various other countries have experienced drastic snow fall leading to declining of inventories. This means, the reserve release from these countries are simply bound to happen regardless to offset potential supply shortages.
On the US front, the Strategic Petroleum Reserve have already declined by 30 million to 40 million barrels since the beginning of January this year, now sitting at the lowest level in almost two decade. Another 50 million barrels release by the end of the year would add 15 percent decline from the reserve annually, potentially pushing the SPR below 550 million barrels, the levels have not seen since early 1990s. This could spark energy crisis in the future if US oil producers could not ramp production growth in the coming year. At the same time, the release of oil may not be the light sweet oil US refineries wanted. According to Bloomberg Report, the majority of oil is likely to be high sulfur crude that would take months for refineries to process and potentially adding cost to gasoline prices, which would be the exact opposite of what President Biden wanted to achieve.
This week, EIA commercial inventory only increased moderately by 1 million barrel, which is still 7% lower than 5 year average. For the whole year, US commercial oil stocks have declined by 50 million barrels, that is despite close to 40 million barrels already released from SPR. The real question remains is 50 million barrels enough to reverse this downtrend; and if demand growth takes off in holiday season which is appearing very likely in recent gasoline and diesel inventory reports, then it suggest more oil from the SPR would be needed in 2022. Failing to follow up with more SPR release in the future due to energy security concerns, crude price have the potential to come back even higher than what we have seen in past months.
On Thursday, WTI crude have already rebound back above $78, Brent crude have surged above $82.
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