The US government, which did not take advantage of the low oil prices during the year to significantly replenish its strategic crude oil reserves (SPR), is preparing to catch up.
The US Department of Energy announced on Thursday that the Biden administration hopes to purchase 6 million barrels of crude oil for delivery in December of this year and January of next year to replenish strategic oil reserves. The upper limit for the price of crude oil purchased in the latest plan is $79 per barrel, which is significantly higher than the $70 target set earlier this year, but significantly lower than the current crude oil futures price around $90.
Boosted by news, WTI crude oil rose 2.5% to $89.46 per barrel on the day.
In March last year, the Biden government sacrificed the largest release of 180 million barrels of oil reserves in the history of the United States to reduce oil prices when the Russia-Ukraine conflict broke out and oil prices soared to more than $100 per barrel. This large-scale dumping of reserves has lowered the United States' strategic oil reserves to their lowest level since 1983.
The Biden administration previously stated that it plans to replenish 60 million barrels of SPR, equivalent to one-third of the release plan.
The price of strategic oil reserves urgently released by the US government is about $95 per barrel, and it was initially hoping to supplement SPR with a lower price range of $67- $72. But the reality is that despite being in this price range several times this year, the US government has failed to successfully replenish a large amount as scheduled.
The reason is that replenishing strategic oil reserves is not as simple as it appears, but rather much more difficult to implement:
The US government attempted to purchase crude oil earlier this year, but it failed. In January of this year, the US Department of Energy cancelled its 3 million barrel replenishment plan, claiming that the price received was too high. Industry insiders point out that the US Department of Energy's bid failed because it quoted at a fixed price, which means that counterparties will have to bear the market risk caused by a fixed price for up to 13 days. Therefore, oil producers may raise prices to hedge against the risk of oil price fluctuations of a few dollars, and the cost of hedging is passed on to the buyer, which is the US government.
The final result is that after releasing a large amount of SPR, the US government has only replenished 4.8 million barrels of oil so far, with an average price of less than $73 per barrel.
The US Department of Energy has recently stated that it will determine whether the submitted bid is acceptable and believes that its price guidance and monthly bidding will enable it to quickly take action when purchasing opportunities arise. The US Department of Energy will issue relevant bids on a monthly basis until at least May 2024, and the specific number has not been determined.
It should be noted that although the extremely low SPR level has been strongly criticized by Republican officials, many analysts believe that US SPR inventory is sufficient to withstand supply shocks, especially considering the rapidly growing shale oil production in Texas and New Mexico, driving US crude oil production close to record highs.
The market closely monitors every move by the US Department of Energy in supplementing SPR. Due to OPEC+production reduction and escalating conflict with Israel, the US Department of Energy's demand for sour crude oil has become even more scarce. Continuing to supplement SPR is bound to further tighten the crude oil market and push up oil prices.
The latest inventory data in the United States is somewhat urgent. The main delivery location for WTI crude oil futures, the Kuxin region, has shown a significant decline in crude oil inventory. As of the week ending October 13, it has dropped to a new low since October 2014 and has fallen to the bottom range of 20-25 million barrels, which is considered by market veterans.
Previously, Wall Street News website articles analyzed that if the Israeli-Palestinian conflict escalates, the rise in oil prices may continue. In the most extreme scenario, if Israel attacks Iran's nuclear facilities (with a probability of about 20%), oil prices may soar to over $150 per barrel.