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Oil: White House Alters Strategy To Try And Avoid Spike In Prices

Published 10/20/2022, 05:37 AM
Updated 07/09/2023, 06:31 AM
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This week, the Biden administration announced the release of 15 million barrels of oil from the U.S. Strategic Petroleum Reserve (SPR). The Biden administration began releasing oil from the SPR early in 2022 to try to combat rising oil and gasoline prices blamed mostly on Russia’s invasion of Ukraine. The administration planned to release a total of 180 million barrels of crude between March and October. Now, the Biden administration has changed its plans so that the final 15 million barrels of this 180 million sum will be released in December rather than in October.

The reason for this change is likely political. This November, there will be elections for all members of the U.S. House of Representatives and 1/3 of the members of the U.S. Senate. The perception is that if gasoline and energy prices are too high, people will vote for Republicans rather than Democrats. Currently, Democrats outnumber Republicans in the House, and the Senate is split 50/50. If Republicans win a majority in Congress, then Biden’s legislative agenda will likely be blocked for the next two years.

The regular sales of oil from the SPR have likely helped bring gasoline prices down in the United States and have contributed somewhat to reducing oil prices globally, because some of this oil has been exported. The original plan would have seen the SPR releases ending around the same time that the 2 million barrels per day (bpd) OPEC+ production cuts would start. This also would have coincided with the Nov. 8 elections. Democrats feared that a spike in gasoline prices at this time would negatively impact their chances at the polls.

The important immediate takeaway for traders is that the 15 million barrel release is the final segment of the 180 million barrel release, not in addition to it. Another important takeaway is that this release will take place in December, rather than October so, traders should no longer expect the double-whammy of OPEC+ production cuts and the end of SPR releases to hit the market at the beginning of November.

There are two more new developments in terms of the Biden administration’s SPR policy that traders should keep in mind in the longer term. First, energy advisor Amos Hochstein said on Wednesday that the Biden administration will consider additional SPR releases over the winter, if needed. This could mean that the Biden administration will release oil from the SPR in response to increases in gasoline prices or that it will release oil from the SPR in response to further production cuts from OPEC+. Neither of these are sustainable policies, and traders need to be prepared for the global market to react when the SPR releases eventually end. If these releases end while global oil markets remain tight, prices could jump when the regular infusion of oil suddenly stops. If the releases end at a time when global demand has dropped as a result of an economic recession (something many economists and bankers are now expecting), the market will likely not feel much of an effect. The global recession would presumably negate the impact of the end of the SPR releases.

Second, the administration said they plan to refill the SPR by buying oil at prices between $67 and $72 per barrel. The Biden administration hopes that this will incentivize U.S. oil producers to “open the taps.” However, this is unlikely to incentivize producers, because, according to the Dallas Fed Energy Survey, most producers believe the market price of oil will be higher than that. There is one circumstance in which this could assist U.S. oil producers. If a global recession causes oil prices to collapse and stay below $72, producers will be eager for the $67 per barrel that the U.S. government will pay (if the U.S. government does not change its purchase price at that point). Refilling the U.S. SPR at a time when global demand has collapsed could act as an important source of demand and act as a lifeline for the U.S. oil industry.

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