Can Oil Bulls Rely on Biden’s Plans to Refill the Strategic Petroleum Reserve?

05/11/2023

3 minutes read

2023.05.11 04:24

The SPR has been causing a great deal of volatility in oil prices lately.
Lack of clarity about when the U.S. government will start refilling the SPR is the main reason for that.
Still, in the long term, traders can count on the fact that the SPR will be refilled.

The SPR has been causing a great deal of volatility in oil prices this week. On Tuesday, oil prices rose, in part based on from the U.S. Department of Energy, which announced that the Biden administration plans to start buying oil to refill the Strategic Petroleum Reserve (SPR) at the end of this year.

According to a report by Bloomberg News, the administration will start purchasing oil to refill the strategic reserves after maintenance on the storage facilities is completed.

Oil prices had been declining on Tuesday based on news that China’s imports had declined significantly in April. Many interpreted that as a sign of economic weakness in China. But reversed its 2.5% decline when the report about Biden’s plan to refill the SPR was released.

By the end of the day, WTI managed to climb back to just over $73 per barrel. However, oil did not manage to hold on to these gains on Wednesday, when a report from the EIA that U.S. crude rose by around 3 million barrels last week. This was a larger-than-expected increase and was caused by another SPR sale and a drop in exports.

Sales of crude oil from the SPR and purchases of crude oil for the SPR have the potential to move oil prices—especially WTI—because they involve large amounts of oil either entering or leaving the market.

Last year, the Biden administration sold 180 million barrels of oil from the SPR and was in the process of selling another 26 million barrels from the SPR in accordance with legislation passed by Congress several years ago. This release added more oil to the market at a time when oil prices were high, and the conflict between Russia and Ukraine had caused a great deal of dislocation in the oil market.

Now, concerns about a global economic slowdown are keeping oil prices lower because this would cause a drop in demand. Large oil purchases of crude oil for the U.S. SPR could act as a form of demand stimulus and help prevent oil prices from sliding too much. The problem is that the U.S. government has not been clear about when it might start refilling the SPR.

Earlier in the year, the Biden administration that when oil prices dropped to between $67 and $72 per barrel, it would start refilling the SPR. But when that window appeared, no orders for oil came from the U.S. Department of Energy.

Apparently, OPEC+ thought that the Biden administration was serious when it said it would start purchasing oil when WTI dropped to between $67 and $70 and was dismayed when that demand stimulus did not appear. This was one reason why OPEC+ decided to implement voluntary production cuts starting in May.

Can traders count on the Biden administration to follow through and start purchasing oil at the end of 2023?

In the long term, traders can count on the fact that the SPR will be refilled. It is a strategic necessity to maintain national petroleum reserves of a certain level. In fact, the U.S. must maintain a certain level of oil in its strategic reserve in order to maintain its membership in the International Energy Association.

However, the lack of clarity about when the U.S. government will start refilling the SPR is not helpful to traders and also contributes to price volatility.

Voters always blame the sitting President for high prices even when that President is not the cause. If oil prices are too high, or the Biden administration fears that purchasing crude oil would cause oil prices to rise, then they are not likely to start refilling the SPR. Politically, this could cause too much trouble for the White House going into an election year.

However, if energy prices are not causing American consumers too much financial difficulty, funds are available, and the maintenance of the storage facilities is complete, the Biden administration will likely start purchasing oil to refill the SPR.Find All the Info You Need on InvestingPro