Adds remarks from Biden, details on IEA release and SPR transportation constraints.
President Joe Biden today ordered the drawdown of 1mn b/d of crude from the US Strategic Petroleum Reserve (SPR) over six months in hopes of reducing gasoline prices until domestic production has time to ramp up.
The largest-ever global release of crude reserves will be a "war time bridge" to shore up global supplies until an anticipated 1mn b/d increase in US oil production is reached later this year, a senior administration official said. Biden said releasing the crude is meant to counter an energy price spike connected to Russian president Vladimir Putin's decision to place troops in Ukraine.
"Our prices are rising because of Putin's action," Biden said. "There is not enough supply. And the bottom line is if we want lower gas prices, we need to have more oil supply right now."
The US will soon issue a notice soliciting bids for the emergency sales, which will make crude available starting in May. Nymex WTI crude futures for delivery over the six months starting in May were averaging near $99/bl as of 1 pm ET, although the SPR's blended crude stream typically sells at a discount. The revenue from the upcoming sale will pay for refilling the SPR once emergency conditions end, which the White House says should give producers an added signal to step up output now.
The US is seeking to coordinate its SPR release with other countries, which should bring drawdowns from global strategic reserves to "well in excess" of the 1mn b/d portion provided by the US, a senior administration official said. Biden estimated other countries will release "as high as somewhere between 30mn-50mn bl." The International Energy Agency (IEA) will hold an emergency ministerial meeting tomorrow.
The US holds the largest strategic oil reserves in the world, with 568mn of crude in the SPR as of last week. Today's 180mn bl crude drawdown will come on top of two other recent withdrawals. Earlier this month, Biden ordered the emergency sale of 30mn bl of crude from the SPR, representing half of a 60mn drawdown organized by the IEA. Biden separately started a program in November offering long-term loans of 21.7mn bl of SPR crude and the outright sale of 18mn bl.
The SPR holds a mix 56pc sour crude and 44pc sweet crude in salt caverns spread across four facilities in Texas and Louisiana that are served by interstate pipelines that connect to nearby refineries and marine terminals. The SPR has a maximum drawdown capability of 4.4mn b/d, but weekly withdrawals have never exceeded 864,000 b/d since withdrawals started in 1985, according to federal data.
Biden's push for sustained withdrawals from the SPR of 1mn b/d over six months risks hitting bottlenecks of surrounding infrastructure. The SPR's ability to add incremental crude to the market has declined over the last decade, as the shale oil boom increased utilization of nearby pipelines and marine terminals along the US Gulf coast, a 2016 review by the US Energy Department found. SPR sale bidders are customarily responsible for arranging transportation.
Getting the 1mn b/d of SPR crude to other US markets could run into other limits. The administration said it plans to "promptly process" requests for waivers from Jones Act shipping restrictions to transport crude from the SPR to other US ports, if there are shortages of qualified US-flagged tankers to carry crude to market, a senior administration official said. The administration has set a goal of providing responses to waiver requests within two days.
Use it or lose it
Biden said he was pairing the SPR release with a plan to put more pressure on domestic producers to increase output. He will call on the US Congress to adopt a "use it or lose it" policy for the 9,000 unused but approved drilling permits the oil and gas industry already holds on federal onshore leases, based on concerns from the administration that companies are hoarding federal leases without producing.
"Congress should make companies pay fees on wells on federal leases they have not used in years, and acres of public land they are holding without production," Biden said.
Biden also intends to urge Congress to speed up the transition to clean energy by providing more funding, the White House said, in a likely reference to $500bn for clean energy and climate change programs in Biden's stalled Build Back Better Act. Biden will also sign a directive authorizing the use of powers in the Korean War-era Defense Production Act to increase domestic production of critical minerals used in large-capacity batteries and electric vehicles.
The SPR release could go some way toward compensating for a potential drop in Russian exports because of sanctions imposed following the outbreak of the conflict in Ukraine. Around 2mn-3mn b/d of Russian oil could be lost as a result of fallout from the conflict, according to forecasts from the heads of trading companies Trafigura, Vitol and Gunvor.
US retail regular grade gasoline prices averaged $4.23/USG in the week ended on 28 March, just 8¢/USG shy of the all-time record set two weeks before. High fuel prices have been a primary contributor to inflation rates hitting a 40-year high and growing frustration among voters with Biden's job performance.
Oil industry officials have argued Biden should focus efforts on increasing domestic output, rather than providing a short-term release of crude from strategic stocks.
"If the administration really wants to be strategic here, they will promote the production of oil and gas in the US through development on federal lands and waters," American Petroleum Institute regulatory affairs senior vice president Frank Macchiarola said in a televised interview.
