The US Department of Energy Dec. 16 announced plans for its first repurchase of oil to begin replenishing the Strategic Petroleum Reserve following an unprecedented 180-million-barrel release over several months to combat energy price hikes spurred by Russia's invasion of Ukraine.
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The DOE issued a solicitation for up to 3 million barrels of sour crude for delivery in February to the Big Hill SPR site in Texas. Bids of at least 300,000-barrel minimum offer quantities are due by 1 pm CT Dec. 28, and contracts will be awarded no later than Jan. 13, according to the solicitation.
The department will also facilitate an emergency exchange from the SPR of roughly 2 million barrels to meet refinery supply needs, in response to the partial shutdown of TC Energy's Keystone pipeline following a leak that spilled about 14,000 barrels of crude in Washington County, Kansas.
The buyback pilots the DOE's updated repurchase authorities, an approach that will lock in a price upfront when companies submit their bids, a senior DOE official told reporters on a call Dec. 16.
The department in October laid out a plan for repurchasing crude to replenish the SPR when WTI crude oil was at or below $67/b-$72/b.
At that time, the DOE also finalized a first-of-its kind rulemaking that gives it the option to pay a fixed price for crude at the time a transaction is executed. Previously, regulations allowed the department to enter into contracts for future delivery of oil for the SPR but tied the price of those purchases to a market index at the time of delivery, exposing producers to volatile crude prices.
With WTI prices around $74/b, "we think that's in the range that it'd be very useful to put this [repurchase] notice out now and to see what the market would provide in terms of interest and at what price level for that February buyback," the DOE official said on condition they not be named.
The largest-ever drawdown from the emergency stockpile sold oil at an average price of $96/b, according to the DOE. Crude volumes at the SPR are currently at their lowest level since 1984.
Future replenishment plans
Analysts at ClearView Energy Partners said the relatively small volume of the buyback was likely a test of the DOE's new fixed-price contracting authorities.
"Further buybacks could follow if the department judges the test to have been successful," they said in a Dec. 16 research note. "We think that could potentially happen as soon as [first or second quarter] 2023, even if delivery does not occur until FY 2024 or beyond. The timing could reflect several considerations, however."
With the new authority, "the US will lock in prices to the taxpayers' benefit and provide price certainty to the bidder that will supply the product," the DOE official said. "We will continue to determine timing on replenishment beyond this 3 million barrels," taking into account market dynamics as well as SPR operational obligations tied to congressionally mandated sales, scheduled return of barrels offered previously under exchanges and maintenance needed to ensure the SPR's structural integrity.
Congressionally mandated SPR sales for deficit reduction and legislative initiatives began in 2017 and are slated to continue through 2031. DOE officials are working on options to delay or cancel some of those sales scheduled to take place in fiscal years 2024 through 2027.
The DOE would need congressional approval to not pursue those sales, which would account for 147 million barrels over that four-year period, according to analysis by S&P Global Commodity Insights.
The DOE official on the call with reporters indicated that conversations with lawmakers on that front have been productive.
"It's an incredibly, incredibly compelling case to have flexibility on those congressional sales so we don't have to do them in any one narrow time period ... [and can] sell when it makes sense to the market and not be forced to sell when it doesn't make sense from a market and a supply-demand dynamic," the official said. "So we're hopeful, but of course we don't speak for Congress."
'Ready to respond'
The Biden administration has touted SPR releases for helping to lower prices at the pump. National retail gasoline prices are down more than $1.80/gal from their June peak, and crude prices have slipped about $50/b since June.
President Joe Biden has signaled further releases from the SPR are possible as his administration considers options for stabilizing global oil markets and addressing pain at the pump domestically.
"As DOE executes on this plan to refill the SPR to previous levels in the coming years, the SPR remains ready to respond to energy security needs today," the DOE official said.