Analysis: The strategic sale of oil in the United States accelerates the fixing of the price of fuel, but at what price?

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The Bryan Mound Strategic Petroleum Reserve, an oil storage facility, is seen in this aerial photograph above Freeport, Texas, U.S., April 27, 2020. REUTERS/Adrees Latif

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April 11 (Reuters) – The Biden administration is selling a record amount of emergency oil from national reserves to bring soaring U.S. fuel prices under control as quickly as possible, but the plan could backfire if the stock fails. is not replenished quickly.

On March 31, President Joe Biden announced that the United States would sell 180 million barrels of crude from the Strategic Petroleum Reserve at a rate of 1 million barrels per day starting in May, the largest outflow from the stock since. its creation in the 1970s. The member countries of the International Energy Agency (IEA) release an additional 60 million barrels to control world prices. Read more

The decision to sell oil from the SPR, instead of taking out a loan, also known as a swap, marked a compromise: the oil would be brought to market faster to drive down prices, but it could take more time to rebuild the stock to its current level, increasing longer-term market risks. Some analysts have warned that this could make oil prices more volatile.

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US oil loans from the SPR guarantee a return of oil over a specified period, but can take up to months to finalize as the government lines up buyers and negotiates contracts.

“When we want to grow global supply quickly, especially by the historic amount we announced, it is much more efficient to make a sale than to seek to arrange contracts on a company-by-company basis (as required by a swap or a exchange)” a Biden administration official told Reuters.

The sale is accompanied by a vague timetable for the redemption of barrels. The emergency stockpile is already at the lowest level since 2002, and if oil prices rise over time, it could be left at even lower levels. If it needs to be replenished when prices are high, taxpayers will have to pay the premium to restock it.

The administration acted after Russia invaded Ukraine and subsequent sanctions and boycotts launched retail gasoline prices to record highs, a vulnerability for Biden’s fellow Democrats during the November congressional elections.

Russia produces around 10% of the world’s oil supply and Western sanctions are expected to cost the world market around 3 million barrels a day, according to the IEA.

A White House fact sheet released at the time of publication said only that the federal government would buy back oil, returning it to the SPR in “future years.”

THINK LIKE A TRADER

“I think that’s extremely cowboy…outright selling, thinking purely like a trader, if I did that, I’d get fired. Nobody knows which way the price of oil will go,” said Ilia Bouchouev, partner of the Pentathlon. Investments and Assistant Professor at New York University.

“It will only increase volatility because it reduces the buffer,” he added.

The SPR now holds 564.6 million barrels, or about a month of U.S. demand for oil and liquid fuels. The post-sale level of 180 million barrels would still be well above IEA requirements that cover 90 days of US crude imports, currently around 3 million bpd.

Oil companies are also expected to start returning some 32 million barrels in the coming months thanks to a loan decreed by Washington last November. Read more

David Goldwyn, former special envoy and coordinator for international energy affairs at the US State Department, defended the administration’s choice of a sale.

He said the scale and length of the release made loan deals with energy companies too complicated. “They gave themselves maximum flexibility.”

Benjamin Salisbury, energy policy analyst at Height Capital Markets, said the sale of a record amount of SPR could increase longer-term market volatility.

“There is a real risk that removing oil from storage, including the SPR, will reduce the buffer to respond to future disruptions, thereby increasing the geopolitical risk premium,” he said.

U.S. gasoline prices soared after global benchmark oil Brent hit a 14-year high on March 7 at over $138 a barrel on concerns over Western sanctions against Moscow. Brent fell after the releases, hovering around $101 a barrel on Friday.

Despite high prices, some US shale producers have been reluctant to increase production and the OPEC+ production group, which includes Russia, has only increased supply gradually as consumers emerge from the pandemic. world of COVID-19.

Wall Street bank Goldman Sachs said the SPR release risked crowding out U.S. shale drillers’ expected output growth of around 1.1 million bpd this year by adding to logistical constraints on the US Gulf Coast.

But Salisbury said a loan was not a good option because huge amounts of oil might have had to be put back into storage before global supplies had had time to subside.

“With the growing risk of a protracted Russian conflict and lingering sanctions, it is unclear whether setting a certain date to take oil off the market to pay off a loan in 6 or even 18 months would be beneficial.” , said Salisbury.

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Reporting by Julia Payne and Ahmad Ghaddar in London, Timothy Gardner in Washington and Stephanie Kelly in New York; edited by Richard Valdmanis and

Our standards: The Thomson Reuters Trust Principles.

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