Speculation over a release of crude oil from the US Strategic Petroleum Reserve may have kept prices relatively in check in the wake of the recent attacks on Saudi oil facilities, but the amount the US government could have got to market may be well below levels needed to offset any significant supply loss.
While expectations are that the US could quickly bring tens of millions of barrels of crude in response to a disruption, the SPR may not be able to distribute much more than 1.5 million b/d if a release is authorized.
The US SPR, which includes two sites in Texas and two in Louisiana along the Gulf Coast, has a maximum drawdown rate of 4.415 million b/d. That means, if activated and fully functional, the SPR would be able to pump out 4.415 million b/d of crude from its storage caverns, according to the US Department of Energy. The SPR is also linked to a complex distribution system of refinery hubs, pipelines, and marine terminals, which could distribute about 5 million b/d in the event a US president authorized a release from government stocks following a supply distribution, according to DOE.
While disruption capability exceeds design drawdown, however, the actual amount the US government would be able to get to market during a supply disruption, like the recent attacks on the Abqaiq oil processing facility and the Khurais oil field, would be substantially lower.
Changes in oil flow
Major shifts in the North American oil market, particularly growth of US shale output and US refiners’ declining reliance on foreign crudes, “have significantly reduced the ability of the SPR to distribute incremental volumes of oil during possible future oil supply interruptions,” DOE said in an August 2016 report.
In that report, DOE looked at seven different global oil supply disruption scenarios, from a hurricane in Mexico that would knock about 1.5 million b/d offline, to a Straits of Hormuz crisis which would cause an 8 million b/d reduction. Under each of these scenarios, DOE looked at the US’ obligation under a coordinated International Energy Agency action. The department found the US would not be able to meet its commitment in five out of the seven scenarios, due to distribution constraints.
“For scenarios that involve large losses to US refiners, space would necessarily open up in the Gulf Coast distribution system to accommodate some of an SPR release, creating a higher level of effective distribution capability,” the report states. “In cases where a dislocation occurred in the world market that did not interrupt US import flows, the task of delivering oil to the market would be more difficult, creating a lower level of effective distribution capability.”
The study said, for example, that if 8 million b/d was disrupted during a crisis in the Straits of Hormuz, the US would be obligated to supply 3.5 million b/d to global supply, but would only have the capacity to supply 1.76 million b/d to 2.56 million b/d, due to limited marine capacity.
For a 6 million b/d Abqaiq disruption, similar to what occurred over a week ago, DOE estimated that the US would be obligated to supply 2.6 million b/d, but would only have the distribution capability of 1.41 million b/d to 2.12 million b/d.
Oil pipelines and terminals
Paul Sheldon, chief geopolitical advisor with S&P Global Platts Analytics, said that SPR deliveries from facilities near Houston, Nederland and Beaumont would be competing for pipeline and terminal space, likely limiting the effective near-term ability to deliver SPR barrels, above existing commercial volumes, between 1.5 million b/d to 2.5 million b/d.
A 2014 test sale of five million barrels out of the SPR found limited pipeline capacity and availability of coastwise-compliant vessels and dock space.
“While the test sale was conducted during a period with no distributions in the global supply, it still presented fundamental questions about the SPR’s capabilities to meet mission requirements,” DOE said.
While crude export infrastructure is growing in the US, any release of government crude during a major supply disruption would be competing for marine terminal space with an increasing number of domestic, commercial barrels producers, who would be trying to move in response to demand.
Essentially, the report concludes, that domestic market changes would likely put SPR barrels in competition with commercial barrels for export capacity, ultimately blunting the intended impact of a global release of government-owned crude.
“Incremental crude delivered into the market acts to mitigate the price escalations and economic dislocation caused by a supply disruption,” the report states. “In order to have a meaningful effect on supply, it is essential that SPR crude oil be delivered into the market without displacing domestically produced crude oil or Canadian imports that are already being transported in pipelines and marine vessels to US refineries.”
Shortly after the Saudi oil attacks, US Energy Secretary Rick Perry announced that he “stands ready to deploy” SPR crude “if necessary.” On September 15, just minutes before Asian markets opened, President Trump tweeted that he had authorized the release of oil “if needed, in a to-be-determined amount.” He later told reporters that he did not view a release as necessary since oil prices had not increased much.
As of September 20, the SPR held 644.8 million barrels of crude, including 250.3 million barrels of sweet crude and 394.5 million barrels of sour crude, according to DOE.