US authorities replenish strategic oil reserve amid falling prices

The United States continues to buy oil for its strategic reserve, which was emptied by more than 40% last year. So far, the pace of purchases remains much lower than sales volumes in 2022. However, the price environment seems to be in favor of the US government’s plans, since so far the OPEC+ countries, despite significant efforts to reduce production, cannot stop the gradual decline in oil prices this year.

The US Department of Energy is going to continue replenishing the Strategic Petroleum Reserve (SPR) in October and November, which was significantly depleted due to unprecedented interventions last year. The US, with the world’s largest strategic oil reserve, completed its second round of purchases this year on June 30 for delivery in September at the Big Hill storage facility in Texas. In total, 3 million barrels of oil were purchased from local suppliers at an average price of $71.98 per barrel, while last year the authorities sold oil to the market at an average of $95 per barrel. Acceptance of applications from suppliers for October and November will begin on July 7th.

Thus, since the beginning of the year, the SPR will be replenished by 6 million barrels, which so far does not even close to cover last year’s interventions in the amount of more than 220 million barrels (see chart). SPR inventories are now at their lowest level since August 1983 at 348.6 million barrels. The US Department of Energy announced that it is going to replenish the reserve if the price of WTI oil is in the range of $67-72 per barrel or lower. The nearest WTI futures on the Chicago Stock Exchange on Friday, June 30, was trading at $70.4 per barrel, while Brent in London was worth $74.9.

Many analysts expected that the replenishment of the US oil reserve, coupled with production cuts by OPEC + countries and a voluntary reduction in production in Saudi Arabia in July by 1 million barrels per day immediately, would lead to an increase in oil prices, at least during the third quarter. However, while the dynamics of oil prices remains stable, and since the beginning of the year there has been a downward trend: Brent has lost 14% in price since January and almost 25% since July 2022. Although Saudi Oil Minister Abdulaziz bin Salman has promised unpleasant surprises for hedge funds that have been playing short in the oil market, so far it has not been possible to reverse the negative dynamics for oil producers. The growth of the Chinese economy after the end of the pandemic has not yet lived up to initial expectations, and in the US and Europe, oil consumption is stagnating. The gradual decline in prices in recent months, at least, does not contradict fundamental factors: for example, commercial oil reserves in the OECD countries at the end of May were only 1% below the average over the past 10 years, so there is no reason to fear a shortage yet.

Reuters analyst John Kemp notes that the market appears to be balanced at the moment, with cuts from OPEC balanced by increases in production from Russia, Iran and Venezuela. “Despite all the impressive rhetoric from the bulls and bears, including some manufacturers and investors, the market remains in a situation where the glass is half empty or half full depending on your point of view,” he said.

Yuri Barsukov