The Energy Department delayed a planned purchase of 6 million barrels of crude oil that would have been used to replenish the nation’s Strategic Petroleum Reserve (SPR). This move could ease some pressure on rising oil prices.
Key Takeaways
- The Biden administration is delaying purchasing 6 million barrels of crude oil to replenish the Strategic Petroleum Reserve (SPR), saying the purchase would be unfavorable for taxpayers.
- Crude oil prices have risen in recent weeks amid supply cuts from Saudi Arabia and OPEC+ producers.
- The SPR is only about half-full after the Biden administration drained almost 200 million barrels from it last year to boost supply amid soaring prices.
- The DOE’s decision to wait for lower oil prices may prevent a short-term run-up in oil prices but would have little effect in the long run due to the vast quantity of crude produced and sold daily.
Officials from the Biden administration said they will wait for oil prices to come down, preferably to $67 to $72 per barrel, to secure a better deal for taxpayers. After draining large quantities of oil last year, the administration intends to refill the reserve to full capacity.
Crude prices have risen to their highest level in more than three months as OPEC+ and Saudi Arabia have cut production in an effort to support prices. OPEC countries have cut output by a cumulative 3.66 million barrels since November of last year, with Saudi Arabia also implementing a standalone cut of 1 million barrels per day in July. The price of West Texas Intermediate (WTI) crude—the U.S. benchmark—traded at just under $82 per barrel on Thursday, its highest level since April 14.
The average price paid per barrel in the existing SPR stockpile is $29.70, according to the Department of Energy.
The Biden administration drained record quantities of oil from the SPR last year in an effort to curtail a steep rise in oil prices and boost supply shortly after Russia invaded Ukraine. Roughly 180 million barrels were withdrawn from the reserve, draining it to the lowest level in four decades. As it currently stands, the reserve contains about half its maximum capacity of 727 million barrels.
How the DOE’s Decision Could Affect Oil Prices
Like most commodities, the fundamental driver of oil’s price is supply and demand in the market. In the long run, any changes to the SPR ultimately will have little impact on oil prices, given the massive volume and global scale of crude production. The U.S. alone generates more than 12 million barrels of crude daily, which means that the Energy Department’s planned purchase equates to just half a day’s production. Also, unlike the production cuts recently enacted by OPEC, which affect daily production volumes, the DOE’s decision doesn’t influence the rate of output and has just a one-time, standalone effect.
Jim Burkhard, vice president and head of research for oil markets at S&P Global, said that the DOE’s decision “will have little impact on prices” because recent output cuts by Saudi Arabia, Russia, and other OPEC+ member states “will have greater impact on the physical oil market.”
Federal lawmakers could, however, influence prices in the short term. By keeping more oil on the market and not lowering supply, lawmakers could prevent a more rapid increase in prices. Last year, the Biden administration sought to increase domestic supply by selling oil to the open market, which put downward pressure on prices. Replenishing the stockpile, as the government eventually intends to do, would have the opposite effect, putting upward pressure on prices.
A decline in oil prices would also translate into lower prices at the pump for consumers, which could cause inflation to ease further.
Source: https://www.investopedia.com/us-energy-department-delays-replenishing-strategic-petroleum-reserve-7569580?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral&yptr=yahoo