The fine print: How a coordinated oil reserve release works
LONDON (Bloomberg) --After many weeks of signaling and speculation, a group of major oil consumers including the U.S. has announced a coordinated plan to tackle soaring energy costs by releasing crude from strategic reserves. The question now is whether it’s going to work.
In a rare bout of coordination with other oil-consuming nations, the U.S. government said Tuesday it plans to offer as much as 50 million barrels from its Strategic Petroleum Reserve. China, India, Japan, South Korea and the UK will join in the effort.
The U.S. decision to tap the emergency stockpile comes as President Joe Biden faces increasing pressure to stem rising fuel prices for Americans slammed by the highest inflation rate in decades. But it also carries risks, including a possible backlash by OPEC+ that threatens to negate any relief. And with so many lingering unknowns, it’s hard to say whether households will actually see much—if any—reprieve in time to prevent a brutally expensive holiday travel season.
Here’s what we know so far:
How quickly will the additional crude make its way to the market?
The Department of Energy is offering 32 million barrels in the form of an exchange and 18 million in advanced sales pre-approved by Congress. Bids for the exchange close Dec. 6. For those who get barrels from the exchange program, the supply is mostly expected to arrive between January and April, though some could come as early as late December. The market will eventually have to return the exchanged crude, between 2022 to 2024. For the barrels up for sale, the tender won’t be announced before Dec. 17. It could still take weeks between that tender and actual delivery, meaning little hope for immediate relief.
Who will get the oil?
The U.S. government is expected to make the oil available to eligible bidders, including major oil companies and international trading firms. In previous SPR releases, refiners that were awarded oil included big companies like Marathon Petroleum Corp. and Exxon Mobil Corp. Contracts have also been granted in the past to trading companies like Trafigura and China’s Unipec. Some barrels in the previous sales have also been sent overseas; there’s no provision keeping this oil in the U.S. We’ll know who’s getting it this time by Dec. 14.
Where is the oil now?
The DOE operates four underground storage caverns, two each in Texas and Louisiana. Combined, they currently store about 606 million barrels, the least since 2003 because it has been selling it as part of a government-mandated program.
What kind of crude is being released?
Only sour crude grades are being released, according to the DOE. That matters because sour crudes have fallen out of favor among refiners globally since it requires more processing that typically needs expensive natural gas. If that’s not the kind of crude refiners are looking for, it could end up being stored in oil tanks or exported, meaning it won’t probably have the broader, immediate effect of reducing oil prices at home. Already, a record volume of SPR crude was exported in October.
Will this release make a dent?
Everyone’s been talking about this possibility for so long that many traders say the plan for the release was already baked into oil prices. That would explain why oil prices are up following the announcement. There’s also a fear OPEC+ officials, who don’t like being bossed around, could respond by canceling plans to boost their own production, negating the addition of stockpiled oil onto the market. The standoff sets up a fight for control of the global energy market. In short, consumers looking for relief at the pump may not see lower gasoline prices for months yet, if at all.
