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US SPR drawdown to average 200,000 b/d for last quarter of 2021: Platts Analytics

Highlights

Part of 20-million-barrel sale mandated by Congress

New supplies may 'modestly complicate' OPEC+ strategy

Some 200,000 b/d of sour crude are expected to hit the market from the US Strategic Petroleum Reserve from October through December, mere months after the US completed April-June deliveries averaging 180,000 b/d.

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The planned sale helps fulfill obligations to fund budget bills from 2015 and 2018 during fiscal 2022, which begins Oct. 1.

"The precise volume will not become clear until the transaction results are disclosed by Sept. 13," as part of a congressionally mandated sale of up to 20 million Mars grade barrels, said Paul Sheldon, S&P Global Platts Analytics chief geopolitical adviser.

Platts Analytics previously assumed the Department of Energy would sell 15.5 million barrels in the first quarter of fiscal 2022, but has upped that forecast to 19 million barrels as flexibility built into the 2018 budget bill allows DOE to frontload some of the SPR sales required between fiscal years 2022 and 2025.

"The Biden administration's recent request for greater OPEC+ supply may indicate a view that current market conditions create a desirable time to monetize SPR barrels, while an increasingly heavy delivery schedule beginning in fiscal 2023 may raise an incentive to proportionally increase near-term sales," Sheldon said.

He added that the projected 200,000 b/d of incremental SPR crude supplies would "modestly complicate the strategy of OPEC+, which plans to increase its crude production by 2 million b/d from August-December in five 400,000 b/d increments."

OPEC, Russia and nine other countries, in an alliance known as OPEC+, are next set to meet virtually Sept. 1 to review their strategy.

"Recent history indicates rising demand concerns over coronavirus variants could realistically cause Saudi Arabia and its partners to slow down or freeze the quota increases," Sheldon said. "On the other hand, rising risks to our assumed Iran framework deal in October could create even more space for OPEC+ to regain market share through the end of 2021."

Price impacts

ClearView Energy Partners, in a research note, said the super-sized sale "could have modest downside impacts to price," amid the OPEC+ supply increases and rising delta variant case counts. Those downside impacts could become more pronounced if the bulk of SPR deliveries arrive in October during refinery turnarounds, the note said.

DOE's decision to frontload the sale also could bring political wins for the White House, ClearView asserted.

"Voters can see gasoline prices a lot more easily than they can see energy transitions, and the White House has thin congressional majorities to defend," ClearView said. "Indeed, [President Joe] Biden's green future may depend on keeping congressional seats 'blue' (and high prices tend to usher out incumbent politicians faster than they usher in new technologies). Accordingly, the White House appears to be responding to potential political risks in both optical and practical ways."

Future sales

Once deliveries of the latest announced sale are wrapped up, Platts Analytics does not expect to see any other offers from the SPR until October 2022, when the administration must start to make good on a mandated sale of 33.5 million barrels.

If frontloading continues, 365,000 b/d of extra supply would hit the market in the first three months of fiscal year 2023, according to Platts Analytics.

DOE is obligated to move another 159 million barrels from the SPR onto the market between fiscal years 2024 and 2027, and a massive infrastructure package being debated on Capitol Hill could trigger another 88 million barrels of SPR sales between fiscal 2028 and 2031.

The stockpile held 621.3 million barrels as of Aug. 20, according to the US Energy Information Administration, but stocks have been on a steady decline since peaking at more than 726 million barrels in early 2010.

If the infrastructure bill passes in its current form, Sheldon said the stockpile could fall below 323 million barrels by 2031. "It appears likely that Congress will mandate even more SPR sales in the months and years ahead, given persistent fiscal deficits and a rapidly shifting view of US energy security," he added.

The US was pumping about 11.2 million b/d of crude in August, and up to 11.4 million b/d for the week ended Aug. 20, according to the latest estimates from the EIA. Output remains well below the pre-pandemic level of 12.8 million b/d in March 2020 before global demand plunged, and the EIA expects production to remain relatively flat through October.