Insight from Washington: The SPR rumor is dead, long live the SPR rumor

When Saudi Arabia, Russia and other oil producing countries decided against a broad increase in crude output in Algiers last month, chatter began that the US was mulling a release from its government-owned oil stocks.

When the Algiers meeting wrapped up, Saudi energy minister Khalid al-Falih told reporters that the market was balanced and that OPEC had adequately boosted supply, assurances which did little for US President Donald Trump, who took to a full audience at the United Nations to declare that OPEC was "ripping off" the world. By the time Trump was done speaking, the chatter about a US Strategic Petroleum Reserve release had become widespread speculation.

Fears over looming tightness in the market late this year, the impact of reimposed US sanctions on Iran and even the impact of rising gasoline prices on November’s US congressional elections had many analysts asking when, not if, an SPR draw would take place.

But a day after Trump’s UN speech, US energy secretary Rick Perry summoned reporters to his office to let them know that an SPR release was not on the cards. Perry denied that the administration was considering such a move and said even if SPR crude was released onto the market, it would have a "fairly minor and a short-term impact."

The SPR was dedicated for true supply emergencies, Perry said, and with the market well-supplied he added that he did not expect one.

Perry's comments seemed to kill the SPR speculation and lay to rest the notion that the Trump administration would intervene directly in the market. “Without supply intervention threats from Saudi Arabia or from the US with the SPR, the market is let free to run until demand destruction becomes the capping price-line,” analysts with Petromatrix wrote a day after Perry’s comments.

But analysts said Perry’s comments may ultimately mean little and an SPR release, potentially later this month, was still a real possibility.

Joe McMonigle, an analyst with Hedgeye Risk Management and former Department of Energy chief of staff, said that DOE, which manages the 660 million barrel SPR, has long held the position that the SPR should be used for supply disruptions, not as a measure to impact prices. But while DOE may not be currently planning an SPR release, the agency’s official position can change with circumstances, McMonigle said, putting the odds of an SPR released before the end of October at 60%.

Even if Perry continues to oppose an SPR release, the final decision will ultimately be up to the White House.

“We always say: that’s the president’s oil and he can do as he pleases,” Ken Vincent, chief of staff of DOE’s office of fossil energy, said during a US Association for Energy Economics conference in September.

Kevin Book, managing director with ClearView Energy Partners, said Perry’s comments on a potential SPR draw were the “party line answer,” and no different from the stances of previous energy secretaries who opposed SPR draws for non-emergency purposes. “But it doesn’t rule out a different answer in a different price environment,” Book said. “Perry’s answer also makes sense tactically. Telegraphing a big draw isn’t a good way to encourage OPEC-plus to add barrels to the market.”

Book said that an SPR draw can impact prices more in a tight market than a slack one, but the impact will likely be short lived since an emergency draw accounts for just over seven hours of global liquids demand.

World’s largest

The SPR, the world's largest stock of emergency crude,(opens in a new tab) was set up in response to the Arab oil embargo of 1973. It has a maximum design drawdown rate of about 4.4 million b/d and it would take 13 days from a presidential decision for SPR oil to enter the US market, according to DOE.

The DOE recently sold 11 million barrels of sour crude from the SPR for loading over October and November, which may cushion some market impact from the Iran sanctions. The sale is one of roughly 300 million barrels worth of sales that Congress has mandated through fiscal 2027. It is possible that the White House could move up the dates of one or more of these sales since they have already been approved by Congress, sources said.

Federal law allows a president to release up to 30 million barrels from the SPR. In 2011, President Barack Obama authorized 30 million barrels to be sold from the SPR, but that was part of a coordinated, 60 million barrel response with International Energy Agency partners to counter supply disruptions in Libya and other countries.

In 2000, President Bill Clinton authorized a 30 million barrel exchange from the SPR to address concerns of low distillate levels in the US Northeast. President George W Bush, who was a candidate for president at the time Clinton authorized that exchange, claimed it was politically motivated, an attempt to lower gasoline prices ahead of that year's election.