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$70/bbl Floor for Crude? US to Start Buying Oil

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The roller-coaster ride for crude might be coming to an end, after the White House confirmed yesterday it would start replenishing the SPR as soon as June. Rumors of this circulated at the start of the week, helping provide a floor for crude prices under pressure from disappointing economic data. Previously, the US government had talked about restarting buying by the end of the year.

The US had paused releases from the SPR earlier in the year as crude prices came down. But recently new withdrawals were carried out, with inventories dropping to the lowest level since early 1983. Strategic reserves in the US were at 585M bbls at the start of the war in Ukraine. The US government since then has sold over 222M bbls in an effort to drive down prices of crude, leaving the current stockpile at 363M bbl. For context, the US consumes around 20M bbl of crude per day.

The situation has normalized

It’s been over a year since the start of the war in Ukraine, with progressively stiffer sanctions on Russia meant to curb its exports of oil. While the West have almost completely stopped buying crude from Russia, new export routes have been opened, and now Russia exports primarily to China and India at a rate similar to before the war started. Middle east producers that had previously sold to China are now getting better prices selling to Europe. In effect, the global crude supply market has rebalanced, and prices have overcome the war distortion.

The SPR is supposed to be around for emergencies, so now that things are coming back to normal, the presumption is that the US government will stop dipping into the reserves. Particularly in the context of major producers already cutting production in order to push up prices.

Normalization has consequences

Returning the SPR to normal, however, means buying back the 222M bbl of oil, which would naturally have an impact on the market. One of the ways to diminish the impact would be to slowly restock. But that would mean the SPR remains under-stocked for an extended period of time, providing an extra vulnerability for the US economy.

A big problem faced over the last year is that with the move towards green energy, many petroleum companies are and were reluctant to spend on increasing production. Even with the transitory high prices of crude over the last few months, it didn’t make economic sense to invest in expanding production. If the green objectives are met, such as banning the sale of new gasoline powered cars by 2030 in the US and Europe, the presumption is that crude prices will be substantially lower in the long term due to lower demand.

Establishing a floor

In order to assuage some of these concerns and incentivize increased production, the White House committed last year to start replenishing the SPR when oil fell below $70/bbl. Which it already did a couple of months ago, but the government didn’t make any immediate moves to start buying. Prices were allowed to tumble further over economic growth fears, leading to uncertainty among petroleum producers that would curtail further production in the short term. Both the IEA and OPEC agree that in the next year or so, demand will outstrip supply in the expected recovery after the coming recession.

That appears to be the impetus behind the announcement to start replenishing the SPR next month. The purchase of 3M bbl is relatively small compared to global demand and even the amount that was released. However, it might give oil some support since it appears the US is taking measures alongside (if not completely independent from) other oil producers to keep the price from falling too far.

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