Crude Oil In Tight Supply? Help From The Strategic Petroleum Reserve Is On Its Way

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Includes: BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Richard Zeits

Summary

The Department of Energy will be in the market periodically selling significant amounts of crude oil from the SPR.

16 million barrels have already been delivered earlier this year.

The next scheduled delivery coincides with the shoulder season and will be material to the domestic supply.

Demand for crude from Gulf Coast refineries is finally recovering after Hurricane Harvey, and massive exports are providing relief. The EIA reported significant draws from U.S. crude oil inventory.

In addition, U.S. production data reported recently by the EIA for the months of June and July showed flattish U.S. Onshore volumes. Significant hurricane-related production interruptions have added to the disappointment on the supply side.

These and other factors have inspired some observers to anticipate that the domestic market for crude oil was tightening. The optimism may be premature, however.

One of the headwinds is incremental supply from the U.S. Strategic Petroleum Reserve that will coincide with seasonally low demand. The U.S. Department of Energy has already delivered significant volumes of crude oil from the SPR so far this year.

Commercial users received ~16.2 million barrels of crude from the SPR during the period from late February through early July. The sale represented ~125,000 b/d incremental average supply.

Plus, the DOE loaned 5.2 million barrels to U.S. refineries from late August through September 29 to enable uninterrupted supply of crude oil during and after Hurricane Harvey. The relief measure represented incremental supply of 150,000 b/d on average. Some additional loan volumes will likely be reported by the EIA in the next few weeks.

However, probably not all readers are aware that the biggest delivery from the SPR this year is yet to come.

Congressionally mandated sales from the SPR of 14 million barrels of sour crude have been auctioned and awarded. The deliveries are scheduled to take place imminently, in October and November, and will represent roughly 230,000 b/d of average incremental supply for the U.S. crude oil market.

SPR Congressionally Mandated Sales

Why 14 million barrels?

A portion of the sale relates to Section 5010 of the 21st Century Cures Act. The Act mandates a sale of 25 million barrels of crude oil over three consecutive fiscal years, beginning in FY2017. Of this amount, in August the DOE auctioned 9 million barrels as required for FY 2018.

In addition, under Section 403 of the Bipartisan Budget Act of 2015, the DOE is mandated to sell a total of 58 million barrels of crude oil from the SPR over eight consecutive fiscal years, commencing in FY 2018. Of this amount, in August the DOE auctioned 5 million barrels as required for FY 2018.

Contracts were awarded to BP Oil Supply, Exxon Mobil (NYSE:XOM), Macquarie Commodities Trading U.S., Phillips 66 (NYSE:PSX), Shell Trading and Valero Marketing and Supply.

Implications

Going forward, there are two components to the SPR flows. The volumes loaned to refineries in August and September will ultimately return to the SPR, reducing supply. This factor is a tailwind. The SPR sale during October-November, on the other hand, is a headwind.

From a long-term supply perspective, it would be correct to allocate these volumes over the entire year. When allocated, the impact of the net ~9 million barrels of extra supply on average global market, or ~25,000 b/d, is immaterial.

However, due to the concentrated delivery time frame during the period of seasonally low demand, the volume is meaningful for the U.S. market and can have an impact on prices in the immediate term.

The sour crude volumes directly compete with U.S. waterborne imports of similar grades from the Middle East and Latin America. The delivery coincides with Saudi Arabia's effort to maintain the tightness of supply during the period of low demand.

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