SPR release may only have a $2 impact on crude price, say experts

There'll be no gain in the long term since US stocks have to be replenished next year

India’s decision to release 5 million barrels of crude oil from its strategic petroleum reserves (SPR) is the culmination of its efforts to forge an alliance with some of the largest consuming countries to counter production cuts by producing nations.

Experts, however, said this could bring in a benefit of only $2 a barrel in the price of crude oil in the short term, with no gains in the long term since the stocks released in the US are in the nature of loans that have to be replenished next year.

Besides, the release can lead to a pushback from producing countries.

According to Aditya Gandhi, vice-president, Publicis Sapient, the estimate is that the releases will bring down oil price by about $2 in the short term but will aid prices in the long run.

“In the short term, it is also possible that OPEC+ may push back its planned production increases for Q1, nullifying some effect of the release,” he said.

The US will release 50 million barrels of crude oil from its SPR. The White House said China, India, Japan, South Korea, and the UK would join it in releasing strategic oil stocks.

The UK said it would allow firms to voluntarily release up to 1.5 million barrels.

Brent was trending above $81 a barrel, unimpressed by the release announcements. “Markets are already off their peaks from October, with part of the decline likely due in part to the threat of SPR releases,” said Paul Sheldon, chief geopolitical adviser to S&P Global Platts Analytics. “Any further impact of an actual SPR release will not be sustained as balances would not change dramatically and OPEC+ would be less inclined to increase its production,” Sheldon said. “But the largely unprecedented price-related release could serve to establish a new short-term ceiling.”

Even though this is the largest SPR release ever, it falls short of the markets’ expectations.

“The markets were expecting the release to be in the range of 100-120 million barrels; however, it may end up in the range of 65-80 million barrels across various nations,” said Gandhi.

The US release would largely be of sour crude whereas the markets needed sweet crude, he said.

“This may help avoid risks of higher oil prices during winter. The International Energy Agency had predicted supply would exceed demand. This has uncertainties due to a possible Covid lockdown impact in Europe, and capital and operational constraints, because of which OPEC members may not be able to produce to their quota,” he added.

These factors will play an important part in short-term prices. In the long term, the issue is different because with the move towards electric vehicles (EVs) and the push to decarbonise, producers do not have enough of an incentive to invest in supply increases.

Until EVs cause a reduction in the use of oil, chances are that markets will remain tight, he said.

S&P Global Platts Analytics cites the Department of Energy data to say the US SPR stockpile had 604.5 million barrels as of November 19. About 58 per cent of this is sour crude and 42 per cent sweet. The US could move as much as 2.12 million barrels a day (b/d) of SPR crude to global markets. As much as 1.74 million b/d of additional marine distribution capacity would likely be needed in the event of a major disruption, such as an attack on Saudi Arabia’s Abqaiq oil-processing facilities, according to a Department of Energy report.

The US’ SPR was established in response to the Arab oil embargo of 1973 and 1974 and acts as “an insurance policy against potential interruptions in US petroleum supplies, whether originating from domestic or international supply disruptions, natural disasters, sabotage, or acts of terrorism”, according to the Department of Energy.

Under a 1974 treaty with 29 countries forming the International Energy Agency, the US agreed to hold inventories equal to at least 90 days of net crude and petroleum product imports. Under IEA rules, the UK, too, is obliged to hold the equivalent to 90 days of net imports — recently they were equivalent to around 4 million tonnes.

The US has about 600 million barrels of strategic reserves. “Though China does not share this data, however, they said in 2017 that they had about 280 million bbl and they bought significant volumes when the prices were down during the pandemic. Unlike the US and China, which have huge reserves, Indian volumes are very small,” said Gandhi.