What Does The Release Of The SPR Mean For Oil Prices?

By Orbex

Because of supply chain issues, oil prices are one of the biggest factors causing higher inflation.

After oil futures crashed into negative last year, they have “overcorrected” and are trading above pre-pandemic levels. This has been a headache for most policymakers, but it’s particularly troublesome for the Biden Administration. In fact, higher gasoline prices can become a political issue, and with the President expanding his net disapproval rating, it’s necessary to do more.

For most of the year, the Biden Administration has been asking OPEC+ to increase production faster to tamp down energy prices.

However, the block has generally stuck to its gradual 400Kbpd per month increase program. And they have insisted that they don’t see any reason to change it.

The Strategic Petroleum Reserve

One of the ways the US could affect the price of crude in the short term is by taking a page out of the Chinese commodity playbook. That would be to sell part of their strategic reserve.

The US has around 714M barrels stored up in case of emergency. The last time the US made use of it was in 2011, during the war in Libya. As a measure of comparison, the US consumes about 20M barrels a day, while the whole world consumes 91M per day on average.

This idea was discussed at different levels. But this option took on more weight after the Senate Majority Leader Schumer called for it on the Senate floor at the start of the week. Since then, US diplomats have been working on coordinating action with other countries affected by the high price of crude.

That said, coordinated action by large oil consumers, such as China and India, could have a bigger impact on bringing down prices.

The responses and price action

Some thought that the threat of releasing the reserves would put pressure on OPEC+ to address the price issue. However, they have been undeterred.

Both their and the IEA assessment suggest that the oil market will balance out next year. A release of the SPR is a temporary measure. And it’s unlikely to move the needle in the long term.

Last night, Goldman Sachs, for example, expected that a release of the SPR wouldn’t affect the price beyond a fluctuation following the announcement. Moreover, they joined several other analysts who agreed that the market has already priced in a release from the US Strategic Petroleum Reserve.

Where things are going

In their earnings reports, both BP and TotalEnergies were budgeting crude prices to average $60/bbl through next year. So, there is a pretty strong consensus that the current crude price situation is largely transitory.

Analysts point to unusual weather during autumn that lead to increased demand for peaking power. In addition, there was an unexpected depletion of stocks going into what’s expected to be an unseasonably cold winter. However, that situation will likely be resolved in the coming months, and crude prices would then return to their normal trajectory.

The SPR might do more than just push crude prices down. Specifically, it could prevent prices from going higher. The release of the reserve is based on the notion that crude prices are being driven higher due primarily to speculation. The SPR has the potential of knocking them out of the market.

On the other hand, if the price is being driven by underlying factors, including inflation and slow growth in production, then the reserve release could have a minimal effect.

Article by Orbex

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