U.S. SPR as a Trading Tool
The U.S. Strategic Petroleum Reserve (SPR), created in 1975 after President Ford signed the Energy Policy and Conservation Act (EPCA) following the Yom Kippur War, has become somewhat outdated by the 21st century. The reserve is stored in four sites in relative proximity to one another around the Gulf of Mexico and contains exclusively crude oil. Yet, judging by developments of the past two years, it still serves more than its original purpose (i.e., ensuring energy security).
With Russia’s invasion of Ukraine, every aspect of global and domestic trade had to be reevaluated, and the effective use of the SPR was no exception. As international oil flows were quickly re-aligned, there was no shortage. Yet the Biden administration decided to release a significant volume of crude oil from strategic stocks to provide an adequate supply cushion and to moderate the impact of every U.S. politician’s worst nightmare, galloping retail gasoline prices. As a result, SPR stocks fell from over 600 million bbls to 347 million bbls by July 2023.
The move, as controversial as it turned out politically, was a success on two fronts. Firstly, upside price pressure was considerably mitigated. Secondly, it did not cost the taxpayer any money, although there is still a long way to go. The average selling price is estimated to have been around $95/bbl while more than 50 million bbls have already been re-purchased close to $70/bbl, Reuters estimates, and three million bbls per month are pencilled in going forward.
The publicized program of SPR replenishment will plausibly continue in case of a Democratic win in November. It might even accelerate should the Republican candidate secure the lion’s share of Electoral College votes, especially if geopolitical tension around the Middle East keeps simmering. Consequently, it will play a supportive role in the formation of domestic and international oil prices in the coming months and years.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.