U.S. President Joe Biden is planning the biggest-ever release of oil from the nation’s Strategic Petroleum Reserve and other major oil producers said they’ll continue their gradual increases in production, but analysts believe the moves will only be a temporary fix for tight global supplies.
“The SPR release is like putting duct tape on a leaking ship — it will hold for a bit but will not sustain,” Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.
Biden plans to order the release of 1 million barrels of oil per day for the next six months from the U.S. Strategic Petroleum Reserve, senior Biden administration officials told reporters on Thursday. The White House said in a statement that the “scale of this release is unprecedented.”
Even so, “the volume of the Russian [oil] barrels is monstrous compared to the amount stored in the SPR,” Raj said.
Oil futures had rallied since last fall before Russia’s Feb. 24 invasion of Ukraine. The U.S. benchmark, which had traded near $94 a barrel before Russia’s attack on its neighbor, briefly traded above $130 in early March as crude jumped to nearly 14-year highs.
“ “The SPR release is like putting duct tape on a leaking ship — it will hold for a bit but will not sustain.””
— Manish Raj, Velandera Energy Partners
According to the Energy Information Administration, Russia exported more than 45%, or 4.7 million barrels per day, of the 10.1 million barrels per day of crude oil and condensate that it produced in 2021. The U.S. SPR, meanwhile, contained a total of 568.3 million barrels of sweet and source crude oil, as of March 25, according to the Energy Department.
At about 568 million barrels, the SPR is already at its lowest level in 20 years, said Raj, and any barrel removed from the reserve “must eventually be replenished, so where will those future barrels to replenish the SPR come from?”
The news of the SPR release sent oil prices sharply lower on Thursday, with U.S. benchmark May West Texas Intermediate crude
down $4.97, or 4.6%, $102.85 a barrel on the New York Mercantile Exchange, while the most-active global benchmark June Brent crude
traded at $107.27, down $4.17 or 3.7%, on ICE Futures Europe.
Raj pointed out that while spot oil prices decline, long-dated oil prices climbed — “confirming the view that the SPR release will alleviate a short-term crunch” in supplies. June 2022 Brent crude was lower, but prices for the December 2023 contract traded higher, for example.
The “2023 situation will get worse once the SPR is gone,” said Raj.
The SPR release news comes on the same day that the Organization of the Petroleum Exporting Countries and their allies, a group known as OPEC+ and includes Russia, announced that they would stick to a plan for gradual oil output increases, OPEC+ said it would lift production by 432,000 barrels a day in May.
Bob Ryan, chief commodity and energy strategist at BCA Research, said the release of as much as 180 million barrels of oil from the SPR likely influenced OPEC+’s decision Thursday.
The release would go a “long way to covering the shortfall in OPEC+ volumes returned to the market since August of last year, which will exceed [1 million barrels per day] by the end of May,” he said. OPEC+ has been implementing monthly output increases of 400,000 barrels per day since August.
Still, the SPR release will be less than that 1.3 million barrel per day production increase we expected from core-OPEC+”— which is mostly from Saudi Arabia and the United Arab Emirates, with some help from Kuwait, said Ryan.
It’s also possible that OPEC+ may not even be able to fulfill its latest production quotas for March, given that it missed its target by 1.1 million barrels per day in February, said Rohan Reddy, research analyst at Global X, based on data from the International Energy Agency. That was partly due to geopolitical issues and general production issues in OPEC+ member nations, he said.
So the market may see 2.5 million barrel per day shortfall “due to both the Russia-Ukraine conflict and OPEC+ production issues,” said Reddy. “The best decision for OPEC+ going forward may be to increase production as oil prices have increased more than 33% already this year.”
OPEC+ will hold its next meeting on May 5.