From a big bang to a steady stream: SPR release to provide only temporary relief for consumers

Source: press release, 6 April 2022

US gasoline retail prices regular all formulations / Daily road traffic index (active fleet this year/active fleet in 2019) (source: Rystad Energy research and analysis, EIA, RealtimeCube)
US gasoline retail prices regular all formulations / Daily road traffic index (active fleet this year/active fleet in 2019) (source: Rystad Energy research and analysis, EIA, RealtimeCube)

The Biden Administration’s decision to go for a “big bang” release of strategic petroleum reserves (SPR) has successfully decreased oil prices, for now. The announced release of 180 million barrels will be spread over the next 6 months. This has delivered an expected change in the Brent futures curve, by shifting prices down in the short term while pushing them upwards again by comparable amounts for contracts expiring later in the year. A pivot around September 2022 can be expected, when the SPR release is likely to end, Rystad Energy research shows.

This release should provide a temporary price relief at pumps as – assuming normal refinery operations – a decrease in prompt crude prices is usually accompanied by a decrease in product prices. This comes at a time when average gasoline prices in the US are $4.2 per gallon, the highest on record.

Indeed, road traffic remains heavily subdued in North America and Europe because of extremely high gasoline prices, and in China due to lockdowns triggered by COVID-19. Soon, China will need to decide whether to persevere with its economically costly zero-COVID-19 policy in the face of rapidly increasing infections.

“The release of 180 million barrels over 180 days will likely result in 1 million barrels per day (bpd) on average, against a potential drop in Russian crude exports of over 2 million bpd. This historically large SPR release is the right decision in the current crisis and consumers should feel the benefit soon, but it only solves half the problem,” says Claudio Galimberti, Senior Vice President, Analysis.

The SPR was established 50 years ago, with an expected life span of 25 years. As such the infrastructure is dated and may be prone to faults and hiccups. The release will lower the SPR level significantly, thus sowing the seed for a future price rally when demand for crude will increase from the need to replenish the stockpile. The crude quality of the release is likely going to be split evenly between sweet and sour grades.

Global balances over the next 12-18 months remain unchanged
Depending on the speed of the SPR release and its duration, it is expected that global S&D balances will be temporarily altered. Assuming an average SPR release of 1 million bpd for the next 180 days – and keeping everything else constant, including OPEC+ production and no swings in demand – supply and demand balances should be less tight over the next 6 months.

In particular, stock draws in the third quarter will be less pronounced and result in only a 0.3 million bpd average draw for the quarter vs. the 1.3 million bpd average draw before the SPR release. However, assuming the SPR will need to be replenished over the course of the fourth quarter and most likely 2023, an increase in crude demand should be expected.

While the pace and duration are difficult to estimate now, the rise nevertheless looks inevitable. From that standpoint, the “big bang” SPR release makes very little change to the 2022-2023 global liquids balance.

Alternative sources: OPEC+ stays the course
The OPEC+ group of oil-producing nations said last week it would aim to raise production by 432,000 bpd in May, continuing with a monthly plan agreed last year to gradually replace output cut at the start of the pandemic.

There have been no pledges by the UAE or Saudi Arabia to tap into their spare capacity and fill the yawning gap between the pledges by OPEC+ and actual aggregate production, which in February – before the sanctions on Russia – stood at almost 1 million bpd.

At this pace, and assuming a Russian crude production loss of 2 million bpd going forward, OPEC+’s gap between pledges and production in May could widen to 3.2 million bpd.

The UAE and Saudi Arabia do not feel the need to break their alliance with Russia and OPEC+, which has for the past 24 months been extremely successful at rebalancing the global market following the largest demand dislocation in living memory that was triggered by the pandemic.

While OPEC has stayed the course on volumes, Saudi Arabia continues to take advantage of the tightening market by raising its official selling prices (OSPs). Another rise in Saudi OSPs is projected for Asia for May – clearly pointing to a tight medium sour market.

Russian crude export flows
There are robust signals that Russian crude exports have been holding up so far, but with unknown destinations. These barrels could end up increasing floating storage levels if they don’t eventually find a buyer. Other options include higher exports to India and, above all China, if these two countries decide to trade-off risks of being sanctioned by the US against the benefits of Russian Urals’ steep discount; The last option for Russian crude exports would be crude blending, in order to make its origin less clear.

Nevertheless, the EU on 5 April edged closer to banning Russia’s oil imports, which would result in a major structural shift in crude flows from Europe to Asia, as Europe has been a major destination of Russian oil so far. It is estimated that up to 2 million bpd of Russian crude production may be lost if the EU bans Russian oil.

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