Myra P. Saefong

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Nov. 15, 2021, 1:27 p.m. EST

Why tapping the SPR is one of many ‘bad’ options to ease gasoline prices

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By Myra P. Saefong

The U.S. Strategic Petroleum Reserve is the world’s largest emergency stockpile of crude oil, but talk of a release from the reserve may be only a short-term fix to high prices of oil and gasoline.

“Tapping the SPR will only address the symptoms of what is driving prices higher and cannot solve the tightness in the market,” Matthew Parry, head of long-term analysis at Energy Aspects, told MarketWatch.

During a White House press conference Friday , U.S. Press Secretary Jen Psaki said the U.S. continues to look at “every tool in our arsenal” to lower gasoline prices, and has taken a range of actions, including engaging with entities abroad such as the Organization of the Petroleum Exporting Countries.

Releasing more crude from the SPR would have no impact on gasoline supplies, said Anas Alhajji, an independent energy expert, who’s also managing partner at Energy Outlook Advisors LLC.

That option is only one of several that Alhajji has outlined —all of which, he says, are “bad options,” including a ban or limit on crude exports and political pressure on OPEC.

SPR release

The size of any SPR release would matter, said Parry, but what is being considered will likely be only be a “drop in the bucket against a backdrop of very low stocks.”

“The market has already priced in an SPR release to a large extent—and much of the price and spread moves seen in recent days are signs of exactly that,” he said.

Last week, front-month U.S. benchmark West Texas Intermediate crude futures /zigman2/quotes/211629951/delayed CL.1 -0.76% fell 0.6%, while global benchmark Brent crude lost 0.7%.

“Any sell-off related to an SPR announcement will be short lived and will not structurally alter the market,” said Parry. “If anything, an SPR release could bring traders—who have been derisking into year-end due to the uncertainty around the SPR—back to buy crude.”

The SPR was established primarily to “reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program, according to the Energy Department. The stocks in the reserve, which have an authorized capacity of 714 million barrels, are federally owned and are stored in underground salt caverns at four sites along the Gulf of Mexico coastline.

As of Nov. 12, the SPR had a total of 606.1 million barrels of crude oil, following a drawdown of 11.6 million barrels in October, which the Energy Department said was part of a fiscal year 2022 mandatory sale.

One of the more sensible solutions might be to do an “exchange,” Tom Kloza, global head of energy analysis at the Oil Price Information Service (OPIS), told MarketWatch.

“Oil could be released in Texas and Louisiana SPR facilities and replaced (by the bidders) some six to 12 months down the line,” he said. “That might ostensibly ease the pressure on winter prices and not compromise emergency reserves down the road.”

To be clear, stocks of the reserve have seen some drawdowns in recent months.

“There have been some recent releases of crude to help counteract the loss of production in the Gulf of Mexico,” said James Williams, energy economist at WTRG Economics. THE SPR saw a drawdown of 3.5 million barrels in stocks in September, citing a “2021 Hurricane Ida Exchange.” But that was “essentially a loan to producer who have restored it,” said Williams.

While an SPR release would “lower crude, and therefore gasoline and diesel prices, it would not solve any problem—and if just for political motives, it would be more effective if done a couple months before next year’s midterm elections,” said Williams.

SPR crude would “mostly go to Gulf coast refiners,” he explained. “They would, in the short term, reduce foreign imports leaving more oil on the international market and lowering prices.”

This, however, “assumes that if we put more oil on the market through the SPR release that it would not impact OPEC output decisions,” Williams said. “If OPEC countered a release by slowing its increase in production quotas, the impact of the SPR could be zero.”

Meanwhile, gasoline prices may continue to be of key concern for consumers.

Regular gasoline prices averaged $3.405 a gallon on Monday, down 2.1 cents from last week, but up $1.285 from a year ago, according to GasBuddy.

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About Myra Saefong

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Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the...

Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005. Myra has been with MarketWatch since 1998 and holds a master’s degree in English literature.

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