US president Joe Biden's administration plans to offer fixed-priced contracts to refill the Strategic Petroleum Reserve (SPR) after 2023 in a bid to encourage US oil companies to bring more production online.
The Department of Energy, which manages the SPR, is launching a rule-making process this week so that it can buy crude to refill the SPR through a competitive fixed-price bid process for future deliveries. Under the current rule, the department can purchase crude for future delivery, but under an index-based bidding process, with the final crude sale prices adjusted based on index prices close to the time of delivery.
The new method "can provide both certainty to industry that there is stable demand for increased production they're bringing online right now, while also providing certainty to the government that SPR has been replenished in a fair fixed price," a senior administration official said today.
The administration plans to call for bids this autumn for companies to sell it 60mn bl of crude to inject into the SPR, energy secretary Jennifer Granholm said in May. The bids are meant for delivery well after the end of fiscal year 2023 — 30 September 2023 — so as not to strain the current tight markets.
For now, the US continues to draw down strategic stocks at unprecedented rates in a bid to bring down oil prices that started rising last year concurrently with the global rebound from the Covid-19 pandemic. The oil price increased by a third since Russia's invasion of Ukraine began on concern about the security of more than 7mn b/d of Russian crude and product exports.
Biden in March ordered 180mn bl to be released from the SPR in May-October as a "war time bridge" to shore up supplies until domestic producers have time to ramp up production later this year. Of that amount, 125mn bl already has been sold and 70mn bl has been delivered, another official said.
The Department of Energy, as part of the same drawdown, offered another 20mn bl from SPR today. The government agency plans to offer up to 2.8mn bl of sour crude and 17.2mn bl of sweet crude with deliveries from 16 September-21 October.
The upcoming sale will offer up to 7.6mn bl of crude from the Big Hill site in Texas, up to 9.6mn bl of sour crude from the West Hackberry site in Louisiana and up to 2.8mn bl of sour crude from the Bryan Mound SPR site in Texas.
US SPR inventory was 474.5mn bl as of 22 July, down by 119mn bl so far this year.
An analysis by the Treasury Department released today suggests that the drawdown of US strategic reserves, together with similar actions by other IEA members, could have shaved up to 42¢/USG from US retail gasoline prices.
The Biden administration has been keen to take credit for recent declines in US average retail gasoline prices after they hit an all time record, in nominal dollar terms, of $5.01/USG last month. That price averaged $4.33/USG in the week ended 25 July, Energy Information Administration data show.
"The current drop in gas prices remains one of the fastest declines in over a decade," the White House said last week. This week's US retail gasoline average price is still 38pc higher than a year earlier.
