The proverbial light at the end of the tunnel for bulls could instead be a train full of demand weakness
Common and perhaps correct perception is that the SPR releases will end right after the November mid-term elections
The DOE appears more measured in its release cadence, with average release volume of 877,000 barrels per day since emergency barrels hit the market, rather than the 1 million per day original plan
Slower release trajectory appears set to push the 180 million emergency release to year-end 2022 or even into January 2023
We clear up - or create - some uncertainty on the remaining barrels waiting to be sold
On March 1, 2022, the United States committed to releasing 30 million barrels from its Strategic Petroleum Reserve (SPR) as part of International Energy Agency (IEA) member country action to release 60 million barrels in response to Russia's invasion of Ukraine.
- 30 million emergency release
On March 31, 2022 President Biden found that a 'Severe Energy Disruption' existed as defined in 42 U.S.C. 6202(8), on the basis that there is a national energy supply shortage that:
(A) is, or is likely to be, of significant scope and duration, and of an emergency nature;
(B) may cause major adverse impact on national safety or the national economy; and
(C) results, or is likely to result, from an interruption in the supply of imported petroleum products.
In a speech that day Biden said:
Today, I’m authorizing the release of 1 million barrels per day for the next six months — over 180 million barrels — for the Strategic — from the — from the Strategic Petroleum Reserve.
This is a wartime bridge to increase oil supply until production ramps up later this year. And it is by far the largest release from our national reserve in our history.
- 180 million emergency release
Easy math. 30 million, plus 180 million totals to a 210 million barrel emergency release.
Not so fast.
On April 1st, the Department of Energy (DOE) confirmed a 180 million barrel release over six months, with releases occurring through October. But, they clarified that the 180 million barrels included 20 million barrels from the prior emergency release.
The SPR will release approximately one million barrels of crude oil per day over the next six months. Crude oil in this emergency sale will enter the market in two releases.
The first 90 million barrels will be released between May and July, through two notices of sale totaling 70 million barrels, and 20 million barrels already scheduled to be released in May 2022. The remaining 90 million barrels will be released between August and October 2022.
Unraveling the Math
On September 19, 2022 the DOE announced it was releasing an additional 10 million barrels of oil from the SPR and noted in the announcement:
Today’s announcement will bring the total to 165 million barrels out of the 180 million barrels the President authorized in March.
That math jives with our analysis, which shows just under 165 million barrels released through this announcement.
Note that the average sales price of SPR releases prior to the 10 million barrels announced last week is approximately $107. Replacing those same 155 million barrels at $80 today would equate into a $4.1 billion "gain."
We can map out the cadence of SPR releases:
From early July 2021 to early September 2021, the SPR was constant at 621.3 million barrels, after which time the DOE:
- Released 20 million barrels as part of a mandatory sale
- Released 18 million barrels as part of a mandatory sale
- Released 32 million barrels in an exchange with the barrels due back by FY24
- Released 30 million emergency barrels as part of the IEA collaboration
- Announced and partially released 180 million emergency barrels after declaring a severe energy shortage, which includes 20 million barrels from the first emergency release of 30 million.
Adding it all up there are 260 million total barrels for sale since September 2021. Congressional Research Service (CRS) pegs the total there as well and shows 190 million emergency barrels rather than 180 million.
Combined mandatory and emergency sales that begin late September 2021 have continued for 54 consecutive weeks with approximately 15 weeks remaining.
We measured the 70 million barrels release timing as part of mandatory (budgetary) sales and exchanges, with the last barrel sent out during the week of April 29th.
Since then, SPR sales have extended for 20 weeks, releasing 124 million barrels through September 16th.
If 190 million is the correct number of emergency barrels, as we believe it is, there remains 66 million to release. At the SPR emergency release rate over the last twenty weeks of 877,000 barrels per day, the math suggests 75 more days of SPR releases, ending December 9, 2022.
If only 15 million barrels remain to be released rather than 25 million, the release could theoretically be shortened to end closer to mid-November.
Utilizing prior SPR release timing, however, suggests a mid-November or even early December end is unlikely. Prior release cadence suggests the final release will occur between December 11th and January 13th, potentially pushing the final barrels into 2023.
A few points:
- This math suggests the SPR ends at 361-371 million barrels, depending on the final outcome of the 180/190 million debate. That should be adjusted for 32 million exchange barrels that will be coming back prior to FY24, so 393-403 million is the correct number to think about.
- We note Biden's authorization provides the Secretary the power to decide when circumstances on the ground warrant canceling SPR releases.
- We continue to believe the arguments for a 'severe energy disruption' appear stretched - there has been no disruption to imports.
- At the same time, we believe the SPR was sized too large at 600-700 million barrels; if now is not the time to reduce it, when is?
- Biden risks having the pendulum swing too far given the recent downdraft in oil prices, oversupply and weak demand could push prices to levels where domestic production growth pauses or declines.
If the Secretary determines the circumstances leading to this finding no longer support initiation or continuation of a drawdown and sale of petroleum from the SPR, the Secretary is authorized to cancel in whole or in part any offer to sell petroleum as a part of any drawdown and sale pursuant to this finding