U.S. Strategic Petroleum Reserve

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The U.S. Strategic Petroleum Reserve (SPR) is being utilized to attempt to mitigate high prices and offset supply losses resulting from the Ukraine-Russia conflictPresident Biden announced in March a plan to release 160 million barrels from the SPR at a pace of 1 million barrels per dayLegitimate questions have been raised on the politics surrounding the release, the SPR replenishment and the cost or benefit to U.S. taxpayersSPR stocks are at the lowest levels since 1987 and are set to fall furtherWe provide context for mandated and emergency SPR sales

• The U.S. SPR was established in 1975 after the OPEC oil embargo and is the largest supply of emergency oil in the world

• 60 salt caverns make up the SPR, with storage capacity of up to 713.5 million barrels of oil

• The stated purpose is to protect the U.S. economy from severe oil supply restrictions and to fulfill obligations under the International Energy Program

• The SPR connects to 25 Gulf Coast refineries, 6 Midwest refineries and 4 marine terminals

• The SPR is engineered to deliver 4.4 million barrels per day for 90 days, dropping to 3.8 million barrels for 30 days

The Biden administration will release up to 260 million barrels from the SPR through the year ending October 2022.

• 20 million barrel mandatory sale

• 18 million barrel mandatory sale

• 32 million barrel exchange

• 30 million barrel emergency sale #1

• 70 million Phase I emergency sale #2

• 90 million Phase II emergency sale #2

Since 2015 Congress has passed legislation which mandated the sale of roughly 370 million SPR barrels to fund budget shortfalls, other activities and SPR modernization.  Approximately 300 million of those barrels remain to be sold.

• Mandatory sales are price competitive; sale proceeds go to the US Treasury general fund

• Exchanges are effectively short-term loans with extra barrels returned to the SPR as interest (payment-in-kind)

• Emergency sales are price competitive; sale proceeds are returned to the SPR Account, which can be used to repurchase oil to replenish but there are no statutory requirements or market conditions that force repurchases

• There are no statutory minimum SPR balances

• International Energy Program signatories are required to hold reserves equal to 90 days of net petroleum imports during the previous calendar year

• Source materials are here and here

Our Take

It surely looks political to release SPR barrels in front of mid-term elections and the size and scale of all combined releases is extraordinary in historical terms.  But we'd note that the vast majority of schedule releases are Congressionally mandated.  The more recent 160 million barrel emergency release doesn't concern us for several reasons.

1. The cash is deposited with the SPR and available to replenish stocks

2. The forward curve is currently backwardated allowing for potential future purchases at lower prices

3. The U.S. can and has taken royalties in-kind

4. U.S. royalties provide a natural hedge - higher prices equate into more cash flow for U.S. coffers offsetting any potentially higher priced repurchases

5. The U.S. can re-balance its mix of sweet/light and sour/heavy SPR barrels upon refilling

6. Current SPR releases are surely helping dampen prices

7. The U.S. bid to replenish barrels in the back end of the curve incentivizes drilling, or should