Prof. ST Hsieh
Director, US-China Energy Industry Forum
April 11, 2022
Honest to God: Nobody knows which way the oil price will go! Future is unknow, decision makers just have to take actions, hopefully, with the best intention. Of course, there is no “free lunch”, and some risks are inevitable.
Releasing SPR vs Loan or Exchange are two options available to President Biden tackling the high domestic gasoline prices. High gasoline prices drive high inflations, which is the major concern of US consumers. As the mid-term election gets closer day by day, and Democratic is expected to lose, it is understandable that Biden took the option to release SPR rather than exchange. IEA quickly joined the US and announced additional release.
Release plans will be detailed by next month, as of now it is not reasonable to worry about future cost of replenishing SPR. Because:
Nobody knows which way the oil price will go!
It depends on when and how the Ukraine will end with a lasting cease fire. It also depends on how the world handling the global COVID-19 pandemic. The global economy, as of now, is heading to a major contraction that could last years. That means, the demand side of oil is very shaky. If the Ukraine war does not destroy major oil production capacity, then the future of global oil price is “down!”
If so, all Biden has to worry about is whether releasing SPR next month will lower US gasoline price before the mid-term election. If the US inflation persists and the Democratic loses the mid-term election badly: he lost. Win or Loss, Biden will not be the President responsible for refilling the SPR.
Analysis-U.S. strategic oil sale speeds fuel-price fix, but at what cost?
Timothy Gardner, Julia Payne and Ahmad Ghaddar
Sun, April 10, 2022, 10:06 PM
(Reuters) – The Biden administration is selling a record amount of emergency oil from national reserves to tame soaring U.S. fuel prices as quickly as possible, but the plan could backfire down the road if the stockpile is not replenished quickly.
President Joe Biden on March 31 announced 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 biggest release from the stockpile since it was created in the 1970s. Country members of the International Energy Agency (IEA) are releasing an additional 60 million barrels to tame global prices.
The decision to sell oil from the SPR, instead of working out a loan, also known as an exchange, marked a tradeoff: oil would be released to the market more quickly to lower prices, but it could take longer to replenish the stockpile to its current level, raising longer-term market risks. Some analysts warned it could make oil prices more volatile.
Loans of U.S. oil from the SPR guarantee a return of oil over a set period but can take up to months to finalize as the government lines up buyers and negotiates contracts.
“When we want to rapidly expand global supply, especially by the historic amount we announced, it is much more efficient to do a sale than to seek to arrange company-by-company contracts (as required by a swap or exchange)” a Biden administration official told Reuters.
The sale comes with a vague timeline to repurchase 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 must be replenished when prices are high, taxpayers will have to pay the premium to refill it.
The administration acted after Russia’s invasion of Ukraine and the sanctions and boycotts that followed launched retail gasoline prices to record highs, a vulnerability for Biden’s fellow Democrats in November’s congressional elections.
Russia produces about 10% of global oil supply and Western sanctions are expected to cost the global market around 3 million barrels per day, according to the IEA.
A White House fact sheet issued at the time of the release said only that the federal government would buy back oil, returning it to the SPR in “future years.”
THINKING LIKE A TRADER
“I think it’s extremely cowboy-ish … by doing an outright sale, purely thinking like a trader, if I did that I would get fired. Nobody knows which way the oil price will go,” said Ilia Bouchouev, partner at Pentathlon Investments and adjunct professor at New York University.
“Doing this will only increase volatility because it reduces the buffer,” he added.
The SPR now holds 564.6 million barrels, about a month’s worth of U.S. oil and liquid fuels demand. The level after the 180 million barrel sale would still be far above IEA requirements that it cover 90 days of U.S. crude imports, currently about 3 million bpd.
Oil companies are also due to begin returning some 32 million barrels in coming months from a loan enacted by Washington last November.
David Goldwyn, a former special envoy and coordinator for international energy affairs at the U.S. State Department, defended the administration’s choice of a sale.
He said the scale and duration of the release made hashing out loan contracts with energy companies too complicated. “They provided themselves a maximum amount of flexibility.”
Benjamin Salisbury, an energy policy analyst at Height Capital Markets, said selling a record amount from the SPR could boost market volatility longer-term.
“It is a real risk that removing oil from storage, including the SPR, reduces the buffer to respond to future disruptions, thus expanding the geopolitical risk premium,” he said.
U.S. gasoline prices spiked after global benchmark Brent oil touched a 14-year high on March 7 of over $138 a barrel on worries about Western sanctions on Moscow. Brent has fallen after the releases, hovering around $101 a barrel on Friday. [O/R]
Despite the high prices, some U.S. shale producers have been reluctant to boost output and the OPEC+ production group, which includes Russia, has only hiked supply gradually as consumers emerge from the global COVID-19 pandemic.
Wall Street bank Goldman Sachs said the SPR release risks crowding out U.S. shale drillers’ expected production growth of about 1.1 million bpd this year by adding to logistical constraints in the U.S. Gulf Coast.
But Salisbury said a loan was not a great option because it may have required the return of huge quantities of oil to the stockpile before global supplies had time to ease.
“With the growing risk of a protracted Russian conflict and lingering sanctions, it is not clear that it would be advantageous to set a date certain for removing oil from the market to repay a loan in 6 or even 18 months,” Salisbury said.