Using Up America’s Oil Reserve Was Easy. Refilling It Won’t Be.

Source: By Jinjoo Lee, Wall Street Journal • Posted: Monday, January 9, 2023

The Strategic Petroleum Reserve’s current inventory might be the new normal

The Biden administration released 180 million barrels of oil from the U.S. Strategic Petroleum Reserve last year.PHOTO: BRANDON BELL/GETTY IMAGES

It took less than a year to draw 180 million barrels of oil out of the U.S. Strategic Petroleum Reserve. Replacing those barrels will likely take a lot longer, if it happens at all.

After President Biden authorized a historic emergency release last year, there were roughly 372.4 million barrels left in the SPR as of Dec. 30, the lowest level in 39 years. No wonder the Energy Department is pivoting toward a refill: In mid-December, the agency announced that it would start repurchasing crude for the SPR. It is taking baby steps, starting with a 3-million-barrel pilot program under which it would offer market participants a fixed price for future delivery. This is a new approach for the DOE, which has typically purchased for more immediate delivery. The idea is to use the fixed-price contracts as a carrot for U.S. oil producers to invest in production.

The carrot might not be all that enticing, though. The White House has indicated that it plans to repurchase crude oil for the SPR when West Texas Intermediate crude oil prices are at or below $67-72 a barrel. That number applies to both current delivery and future delivery. In a November interview on Bloomberg TV, Amos Hochstein, the State Department’s energy envoy, clarified that the DOE will start buying back barrels when “prices get to somewhere in the $70 range on a consistent basis.”

A good buying window might be approaching if the administration wants to take it: WTI crude is trading around $74 a barrel today. Waiting around to sign future delivery contracts at the $70-a-barrel range could prove trickier.

“I’m skeptical they’ll get a lot of interest from folks,” says Bob McNally, president of Washington, D.C.-based consulting firm Rapidan Energy Group, who notes that while some producers do sell contracts up to one year out as a hedge, it is rarer for them to lock in prices for further-out delivery.

The point at which WTI prices fall below $70 a barrel is October 2024, 21 months out. To attract more interest, the DOE might have to offer a higher purchase price. In fact, Bloomberg reported Friday that the Biden administration is delaying the replenishment of the SPR because the offers it received are either too expensive or didn’t meet required specifications.

A DOE spokeswoman confirmed that the agency won’t be buying for the February delivery window. “DOE will only select bids that meet the required crude specifications and that are at a price that is a good deal for taxpayers,” the spokeswoman said in an email.

Another question is whether the DOE even has enough funding to fill the SPR to the brim. Through last year’s emergency release, the government sold 180 million barrels at around $96 a barrel, implying $17.3 billion in proceeds. Of that, some $12.5 billion was stripped away for Congressional use in the latest spending bill, according to Kevin Book, managing director at ClearView Energy Partners, a Washington, D.C.-based energy research firm. That is because Congress needed to make up for the funding shortfall that was created when it canceled 140 million barrels worth of mandated SPR sales for fiscal years 2024 to 2027.

That leaves the DOE with roughly $4.8 billion of purchasing power. Even if the DOE does manage to refill at $70 a barrel, that implies an SPR top-up of less than 70 million barrels, which would only take the SPR back up to 440 million barrels, the amount it had in 1984. On a finer accounting point, Congress left intact 26 million barrels worth of mandated SPR sales this fiscal year but there are also around 25 million barrels that need to be returned to the SPR through its exchange program by the end of fiscal year 2024—so those barrels effectively cancel each other out.

So what would it take for the DOE to refill the SPR? One option is for Congress to direct funding toward the SPR Petroleum Account, a move that seems unlikely since there doesn’t appear to be much political will to direct funds toward the SPR, according to Mr. Book. Another possibility is a major downturn that severely reduces oil prices.

Oil-industry analysts generally agree that the 180-million-barrel emergency release last year helped relieve upward pressure on oil prices. The White House was using the $70-a-barrel purchase intention in the hope that it would put a floor on oil prices to motivate future production. The DOE’s depleted wallet for SPR refills, though, means that the floor probably won’t be very effective. The $70-a-barrel floor “doesn’t exist anymore, really,” said Ilia Bouchouev, managing partner at Pentathlon Investments and former head of oil derivatives at Koch Supply and Trading.

What seems more likely is a new normal for the SPR, which might be left leaner for quite some time. With European sanctions on Russian petroleum-product imports still a month away and a reopening of China under way, that cushion could be useful.

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Write to Jinjoo Lee at jinjoo.lee@wsj.com

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