U.S. SPR Inventories Reassessed

The U.S. Strategic Petroleum Reserve is being replenished. SPR played a salient, albeit somewhat controversial, role in the immediate aftermath of Russia’s invasion of Ukraine. The Department of Energy released close to 220 million bbls from emergency stocks; the sale of 38 million Congress-mandated barrels was dwarfed by the 180 million bbls that was made available over a six6-month period in 2022. Strategic crude oil inventories declined from around 580 million bbls in March 2022 to 347 million bbls by July last year.

The declared objective of the SPR, which was created after the 1973 energy crisis, is to ensure energy security in times of crises. The Russian hostility towards Ukraine did not create a crisis situation as U.S. commercial oil inventories did not plunge considerably in March 2002 and, in fact, they started to grow from April onwards. Domestic crude oil production had also been recovering from the devastation caused by the Covid-19 pandemic in 2020-2021 and the U.S. remained a net exporter of crude oil and petroleum products.

What changed considerably was perception. The uncertainty precipitated by the invasion of Ukraine led to a hasty surge in U.S. retail gasoline prices. Between the end of January and the middle of June 2022 the pump price of the All-Grades Reformulated Gasoline jumped from $3.71/gallon to $5.49/gallon, the highest on record. Flooding the market with emergency barrels aimed to bring down retail gasoline prices and not to ensure adequate supply as there was no shortage of refined fuel.

The U.S. administration collected around $95 on average for every barrel they sold out of the SPR. The announced target is to replenish these inventories around $79/bbl, which would enrich the U.S. taxpayer by around $3 billion. It is this refilling that is currently under way. According to the U.S. energy secretary, an additional 40 million bbls or 145,000 bpd will be replaced this year. As the U.S. SPR has been turned into a political tool it is fair to say that whenever WTI breaks significantly below $80/bbl in coming months it will be supported by government-buying whilst recent experience suggest that the administration will not shy away from using the SPR for political/commercial purposes if or when retail gasoline prices break above $5/gallon on a sustained basis.

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