What is going on with that magical SPR release?

Ever since President Biden coordinated a joint release of oil reserve with various asian countries few weeks ago, crude price have slipped from the peak of October. And the later development of Omicron variant initially discovered in South Africa, have created fear of demand destruction for oil. As a result, oil market had the worst week last week since April, 2020.

However, the fear of the new variant seems to be overblown. Although jet fuel demand still lagging due to travel restrictions imposed worldwide, a recent announcement from Dr. Anthony Fauci, eased off excessive fear over the new variant. 

Fauci mentioned that Omicron likely has a higher degree of transmissibility but is less severe compared to the Delta variant.  His statement effectively ruled out a potential lockdown that could slow down economic recovery.

So far, Crude price have bounced off from last week’s low, it is now up three consecutive day in a row. A new API report released on Tuesday afternoon this week indicated a 3.8 million barrels fell of oil stocks, largest since late September. Even last week’s EIA report indicated a draw despite 2 million barrels released from the reserve. 

In the meantime, most of the oil being released from SPR are higher sulfur oil which costs more to refine. Chris Barber, principal analyst at consultant ESAI, also commented that “Taxes on U.S. inventories may discourage refiners from adding inventories in December. ”  These reasons pushed most of the oil going overseas into global market. November’s customs data, released on Tuesday,  also witnessed a muring of oil  import in China. Crude oil imports were 10.17 million barrels per day, significantly higher than October. 

50 million barrels may seem like a lot, but according to the EIA energy report, Strategic petroleum reserve is already down over 40 million barrels per day this year. Nevertheless, 40 million barrels from SPR did not slow down inventory draw in the US commercial inventory. In the begging of year, commercial oil stocks sit around 485 million barrels; last week, the number fell to 433 million barrels, the lowest since 2018.  If 50 million barrels fail to prevent inventory drawing down in 2022, more oil from SPR would be needed, but that creates an energy security issue, as we know the Strategic Petroleum Reserve currently sits at the lowest level in almost 20 years, just slightly above 600 million barrels. It is now becoming a really doubtful situation, what will the US do next time when oil bounce back to $80 after the SPR release is over?

 

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