Market Alert: Crude from Government Stocks to Lower Prices

In September of 2000, President Bill Clinton announced a 30-million-barrel drawdown of the SPR to address high heating oil prices. The Administration had already taken the unusual step of setting up a Northeast heating oil reserve in July of that year. The drawdown of SPR crude oil was to address oil prices. A cynic would point out that this was an election year when Clinton’s Vice President, Al Gore, was running for President. President Biden has taken a page from the Clinton book and authorized a 50-million-barrel draw down from the SPR to address high gasoline prices, which appear to be contributing to rising inflation. The same cynic would point out that 2022 is an important legislative midterm election year.

Eighteen million barrels of the drawdown will be an acceleration of an existing mandate to reduce the size of the SPR. The timing of the release of those 18 million barrels is vague, expected over several months, but will not start until 2022. The bigger draw is an “exchange” of 32 million barrels. That means refiners can elect to take SPR crude oil in the weeks or months ahead and then return the same volume “with interest” or an additional volume of oil, likely in the 4-5 percent range. Refiners are not forced to take this crude oil and they have until the end of 2024 to repay it to the reserve.

Clinton’s exchange took about 3 months. We expect this drawdown to take longer, so have estimated 120 days starting in January. Recall, that a previous (August) 20-million-barrel U.S. SPR sale will be completed in December. Evenly spread over 120 days, Biden’s exchange would result in a 270,000 b/d increase in crude supply from January through April. We expect the 18-million-barrel release will not be exactly contemporaneous with the exchange, but if we layer in 18 million barrels over the same 4 months, that will mean another 150,000 b/d of additional supply in early 2022. In sum, the U.S. would add about 420,000 b/d of crude oil to the global market over several months, if implemented quickly and fully (see chart below).

Biden Multilateralism

One area where President Biden has been quite consistent is his preference for multilateral solutions. To that end, the U.S, has cajoled Japan, South Korea and the U.K. into also drawing down strategic stocks. In addition, the Biden Administration has claimed credit for getting China to release in concert with the others even though the Chinese government had already drawn down crude in September and indicated that it would likely do another drawdown by the end of the year. Likewise, India had already decided on a stock draw. We estimate the total from these five countries will be between 22 and 25 million barrels. The chart above shows ESAI Energy’s estimate of the pace of additional supply from all government stock draws if executed as quickly and as fully as possible.

Permanent Change in Modus Operandi?

The question that swirls around this SPR announcement is whether the decision by the Biden Administration to press hard for an apparent multilateral use of SPRs signals a new strategy by consuming countries. Either a strategy to confront the OPEC+ countries or a strategy to be more interventionist in markets. ESAI Energy believes that generally this does not signal a new strategy. Although not multilateral, the SPR was also used by the Clinton Administration to address prices and will likely be used again by Presidents after Biden. Moreover, this drawdown does not seem that much like a multilateral statement when you consider that Japan, India and China had already made decisions to draw strategic stocks this year. Moreover, Europe has declined the invitation except a small volume from U.K. storage. In one way, however, this SPR decision is different. Some countries are actively thinking about shrinking (or not building out) their strategic reserves as part of the expected decline in oil use within the energy transition. This puts government controlled stocks more squarely on the table for use when policymakers are dissatisfied with market prices. For the time being energy security concerns do not rival economic concerns and it would take a significant disruption to reverse this trend.

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