On May 5, local time, the U.S. Department of Energy announced plans to tender and purchase 60 million barrels of crude oil this fall to replenish the depleting Strategic Petroleum Reserve (SPR). The specific time will depend on expected market conditions, focusing on when oil prices and demand are expected to increase. will go significantly lower.
It is worth mentioning that this crude oil purchase plan comes only one month after announcing the SPR release plan totaling approximately 180 million barrels. What is the plan of the Biden administration?
According to a statement from the U.S. Department of Energy, it can be learned that this purchase plan is to replenish the continuously depleted strategic reserves on the one hand, and to give oil companies a signal to increase production on the other.
Wall Street News previously mentioned that the Biden administration announced at the end of March that it would release 1 million barrels of strategic oil reserves per day in the next six months, releasing a total of 180 million barrels of oil, the largest release since the United States established the oil reserve plan in 1974. If all 180 million barrels of crude oil in the Biden administration’s “unprecedented” large-scale oil storage release plan are released, the United States’ strategic oil reserves will fall to the lowest level since 1984. As of last week, U.S. oil reserves stood at about 550 million barrels.
The U.S. Department of Energy said in a statement that it would use future purchases to offset the sharp drop in oil prices, hoping to give oil producers and their shareholders the confidence to invest in drilling. The government’s buyback strategy “will lower oil prices this year by guaranteeing future demand and encouraging the production we need now, at a time when market participants expect crude oil prices to be significantly lower than current levels.”
Although U.S. oil prices are still at high levels at this stage, some domestic oil producers are still hesitant to increase production due to violent market fluctuations and severe backwardation in the futures market.
According to data from the Chicago Mercantile Exchange, the spot price of WTI on Thursday was $108/barrel, but the price of oil for delivery in December 2023 was only $84/barrel, and the price for delivery at the end of 2024 was $76/barrel.
Wall Street News has also mentioned before that part of the reason why U.S. shale oil companies are unwilling to significantly increase production comes from Wall Street. Investors and banks have pressured oil companies to use excess cash flow to pay down debt, buy back assets and pay dividends.
Bernstein Research, an independent asset research company, has estimated that the seven major oil giants including Exxon Mobil, Chevron, Shell, and BP plan to repurchase US$38 billion in shares this year. Analysts at Royal Bank of Canada even predict that the repurchase scale may reach US$41 billion. This repurchase scale is the highest level since the US$46 billion repurchase record in 2008, and is close to the US$21 billion repurchase scale in 2014. Twice (the last time oil prices exceeded $100/barrel).
S&P Global commodities analyst Roger Diwan said the Biden administration’s two-step SPR strategy will “depress near-term oil prices, push up future oil prices, and provide hedging and market signals.”
Former U.S. President Trump also tried to use strategic oil reserves to support domestic producers in March 2020, at the beginning of the outbreak when demand collapsed and oil prices plummeted.
The U.S. Department of Energy said that the 60 million barrels of crude oil to be purchased back through bidding in the fall of 2022 will be the first step in a series of purchases. Future delivery windows will likely occur after the federal fiscal year ending in September 2023.
</p
