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Barrels Coming in, Barrels Going Out. SPR Nonsense.

Author: Brynne Kelly 2/19/2023

Oil started the week stronger on the back of Russia's announcement February 10th that it would cut production in March by 500,000 bpd. However, after the initial spike markets moved on when the Biden administration announced late Monday that it would indeed go ahead with its previously 2023 mandated sales of 26 million barrels - defined by pre-existing laws - despite suggestions the US administration would cancel or at least delay this release after the large emergency releases last year. As reference, 2015 legislation established SPR sales from 2018 through 2025 to fund federal spending — which means Congress would have needed to intervene to halt this year’s sale. They didn't.

The DOE said bids on the oil for sale are due Feb. 28 and the oil would be delivered between April 1 and June 30 which equates to just under 300,000 bpd. All in all, a 500,000 bpd cut from Russia was partially offset by roughly 300,000 barrel increase from the US via the mandated SPR sales.

This, combined with large inventory builds reported for the week ending February 10, 2022 put pressure on prices. Despite the fact that both the IEA and OPEC released positive demand forecasts.

WTI Futures Curve Shift Since February 10, 2023...

Futures sold off on the week, but it is mildly notable that neither the contango part of the curve structure steepened aggressively, nor did the backwardation drop significantly in the flat price drop. This could be a sign of underlying strength. It could also be related to the coming WTI release date timing. More on that below. Presently it might be helpful to get the whole SPR buying-selling-borrowing dynamic sorted out.

Barrels Coming in, Barrels Going Out

There is some confusion around SPR activity lately. Recall that contrary to the sales announcement above, on October 18, 2022 the White House had announced future oil actions were intended to bring down domestic costs'. Pursuant to their inflationary concerns back then their press release read:

...the President is announcing that the Administration intends to repurchase crude oil for the SPR when prices are at or below about $67-$72 per barrel... As part of its commitment to ensure replenishment of the SPR, the DOE is finalizing a rule that will allow it to enter fixed price contracts through a competitive bid process for product delivered at a future date. This repurchase approach will protect taxpayers and help create certainty around future demand for crude oil. That will encourage firms to invest in production right now... and bring down energy prices that have been driven up by Putin’s war in Ukraine.

So we have a technically mandated, (but really discretionary) oil sale pending now and 'price-driven' barrels being purchased. And as the saying goes.. that's not all!

WTI Remains Above the Target Repurchase Range in the Short-term and Below the Target Repurchase Range in the Longer-term...

On top of the DOE playing market-maker between $70 and $80 some of the 180 million barrels released in 2022's "emergency" were loans meant to be repaid in 2023. Confused yet? Let's take a look.

Last Year's Oil Loans Coming Due

From December 2021 to April 2022, the US DOE also issued 32 million barrels of oil on loan that due to be repaid. one loan is to be repaid between June '23 and Dec '23. The second seems is slated for repayment between June 24 and Dec '24 (see here for our detailed report on that repayment schedule). This was part of the record release of 180 million barrels in 2022 to combat high gasoline prices.

US SPR Loan Repayment Schedule...

These barrels are supposed to flow back into the SPR inventory either this summer, next summer or a mixture of both, depending on which repayment option the borrower chooses.

Ahead of these loan repayments back in to the SPR, we now have barrels flowing out of inventory due to previous mandates. There is a lot of noise.

  • Seller above $72 between April 1 and June 30

  • Buyer under $72 open order disc.

  • Buyer by proxy between 6/23 and 12/23

  • Buyer by proxy between 6/24 and 12/24

Meanwhile demand forecasts are on the rise.

Demand Forecasts Increase

The IEA forecast an additional 500,000 barrels per day of consumption from China this year that would take global oil demand to a record high. “Global oil demand is set to rise by 1.9 million bpd in 2023, to a record 101.7M bpd, with nearly half the gain from China following the lifting of its COVID restrictions,” the agency said in its January market report.

The problem with buying into these bullish forecasts is that there hasn't been any hard data to support it. Especially as US commercial inventories continue to rise.

US Commercial EIA Inventories are on the Rise...

Price Floors Have Not Been Sticky

Repurchase price targets have not led to any action. Initially the DOE stated that the Administration could start filling the SPR when oil prices dropped below $100 per barrel. When that level came and went, they adjusted their floor to $80 per barrel.

NOW, the repurchase range is $67-$72. Not for nothing, but these price floors do not feel real. Every time they are tested, the floor moves lower. While the current floor seems to be providing some support to oil prices, history has shown they are easily tested and fail.

'Cancel if close' comes to mind. This is a game of chicken. Implicitly, this this market has become the DOE vs OPEC. The former has shown a bias towards loosening, the latter has show a bias towards tightening. Neither are being legitimately tested between $75-$85 range.

Higher prices would move OPEC to increase supply, lower prices would move the DOE to increase demand.

As a result, the US remains weaker than global markets. This is where the true battle lies. Between the US and everyone else.

Steep Contango in WTI/Brent Spreads...

The steep contango in the WTI/Brent spread curve remains unnatural. It suggests US oil's ability to reach global markets has reached capacity. This spread could easily normalize in either an up or a down tape. Meaning the contango could be normalized not just by front spread strength, but also by weakness in the back. The SPR sales months could feasibly lead a downdraft and lag a rally

One thing is for certain, the relative value of WTI is 'in play' against Brent.

WTI/Brent Curve Shift Since January 2022

Zooming out, the WTI/Brent spread curve is close to where it was trading in January, 2022 (red line vs gold line above). The more pressure on the spread, the less outright prices are supported.

Leadership changing hands

One bright sign of leadership comes from gasoline markets. The fourth quarter gasoline/distillate spread continues to rally. Not enough to lead the market, but enough to not discount it either.

Gasoline/Distillate Spread Normalizing...

Gasoline markets are US-led and they are trying to take the lead again. The internals show leadership but not aggressive buying as of yet. Not enough yet to impact WTI vs Brent. It makes sense to assume Gasoline may lead rallies again, and oil can lead selloffs.

Bottom Line:

The bull market is fatigued and needs to regain its footing. But small players continue to sell it in the hole. The Biden Administration keeps canceling bids when close and then selling into weakness. But the OPEC+ team (Russia solo technically) is putting a bid in through supply cuts and may cut more.

Given the fact the DOE has gone from:

  1. Implying it would buy under $100 to...

  2. Lowering that bid to around $80 to....

  3. Then lowering their bid yet again to the $67-$72 corridor...

  4. While actually announcing more SPR sales while oil is trading just under $80 (where they said they'd buy a couple months ago)

All the while knowing significant oil loans are due for repayment starting in mid 2023. Would anyone be surprised if the DOE deferred the loans a little more if prices were higher? It seems one side of this experiment is indeed a moving target.

Biden's Appointment book?...

Actionably speaking: If the SPR release has an effect on the curve it may also be a driver of WTI/Brent boxes.


EIA Inventory Recap - Week Ending 2/10/2023

Weekly Changes

The EIA reported a total petroleum inventory BUILD of 17.30 for the week ending February 10, 2023. Of this, Commercial inventories posted a small weekly BUILD of 16.30 while SPR inventories were flat on the week.

YTD Changes

YTD total petroleum EIA inventory changes show a BUILD of 69.60 through the week ending February 10, 2023, well above prior year builds through this date.

Inventory Levels

Both Distillate and Gasoline inventory levels hover at the low end of their 5-year average for this time of year while US Commercial Crude inventories continue to exceed its 5-year average.


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