The US Department of Energy is no longer looking to purchase up to 3 million barrels of oil for delivery in August and September to a Strategic Petroleum Reserve site in Louisiana as initially planned.
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Register NowThe decision comes as crude oil futures are at their highest level since late October with the market bracing for a potential escalation in Middle East and Ukraine-Russia tensions that could hit supplies. Market watchers have also seen a strengthening in differentials for heavy crudes in the US Gulf Coast amid SPR buybacks and other factors.
The DOE's SPR refill strategy has hinged on ensuring that taxpayers see a return on the 180 million barrels of oil the department sold from the SPR in 2022 at an average price of $95/b to combat energy price hikes spurred by Russia's invasion of Ukraine.
"Keeping the taxpayer's interest at the forefront, we will not award for the Bayou Choctaw SPR site in August and September, and will continue to solicit available capacity as market conditions allow," a DOE spokesperson said in an email April 3. "As always, we monitor market dynamics to remain nimble and innovative in our successful replenishment approach to protect this critical national security asset."
In March, the DOE issued solicitations for 1.5 million barrels of sour crude for August delivery to the Bayou Choctaw facility in Louisiana and for another 1.5 million barrels for September delivery. Bids were due March 26 and April 2, respectively.
"Without Bayou Choctaw deliveries, the SPR is still expected to receive 18.7 million barrels between now and the end of September and generate just above 100,000 b/d of crude demand," said S&P Global Commodity Insights analyst Rishabh Sharma. "As of April 2, the SPR reserves stood at 363.6 million barrels, sitting at half of its design capacity of 713.5 million barrels, providing ample space for additional crude oil storage."
'Price sensitivity'
Analysts at ClearView Energy Partners said in an April 3 research note that the cancellation "could suggest a new degree of price sensitivity on the part of the Biden administration." They added that "the mid-March addition of the Bayou Choctaw buybacks would have ramped up what we call 'SPR demand' from [about 100,000 b/d] to [around 150,000 b/d," and the DOE "may have decided it does not want to risk driving prices any higher."
In midmorning New York trading April 3, at 1446 GMT, NYMEX May WTI was up 57 cents at $85.72/b and ICE June Brent traded 69 cents higher at $89.61/b.
The market had previously not considered ongoing geopolitical conflicts as a threat to global oil supplies because the war between Israel and Hamas seemed contained. But recent accusations by Iran that Israel conducted an airstrike on its consulate building in Syria has the market on edge about the possible expansion of the regional conflict. And prospects of an extension to OPEC supply cuts is also exacerbating a tightening supply outlook.
Further, Mars spot crude price differentials rose after the DOE March 28 awarded contracts to buy 2.8 million barrels of oil for the SPR at an average price $2/b above its announced target purchase price of $79/b.
Front-month Mars was assessed by Platts at a $1.60/b premium to WTI April 2. That was down from a $2.10/b premium April 1, but up from a $1.45/b discount Feb. 29. Platts is a part of S&P Global Commodity Insights.
Buyback or pivot
The 2.8-million-barrel buyback for September delivery as well as a previously announced 3.25-million-barrel purchase at $77.43/b for August delivery, both to the Big Hill SPR site in Texas, will continue as planned, the DOE spokesperson said.
It is unclear whether the department in April will seek contracts for oil delivery to Big Hill, in line with the monthly cadence of solicitations for that site seen since October.
Nonetheless, the DOE is nearing completion of its commitment to return all 180 million barrels withdrawn from the emergency crude stockpile through its three-pronged replenishment strategy. That strategy entailed direct purchases with revenues from emergency sales; exchange returns that include a premium of oil above the volume delivered; and a legislative fix in 2022 that eliminated SPR sales unrelated to supply disruptions.
The DOE has managed to close contracts for 32.3 million barrels at an average price of $76.98/b and accepted or scheduled about 4 million barrels in exchange returns on top of the 140 million barrels of congressionally mandated sales through fiscal year 2027 that were cancelled. That means it has accounted for about 176 million barrels.