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Road to Nowhere, Part 2 - Oil Prices Have Moved Lower With SPR Releases, But Production Still Lags

The swift increases in crude oil and gasoline prices that followed Russia’s invasion of Ukraine in February — and the sanctions that were implemented soon thereafter — spurred a lot of concern that the U.S. and global economies would go into a tailspin. In response, government officials here and abroad turned to their strategic reserves as a way to quickly balance the market and rein in prices while buying time for additional oil production to come online. But U.S. production growth and rig activity have hit a wall since June, when releases from the Strategic Petroleum Reserve (SPR) started to pick up steam, reducing the prospects for a significant output increase this year. In today’s RBN blog, we examine the changes in the market since the major withdrawals were announced, how the hoped-for bridge to higher oil production has so far failed to materialize, and why it’s unlikely the government will turn to the SPR if prices spike again soon.

The Biden administration, fully aware of the public's sensitivity regarding gasoline prices, hasn’t been shy about tapping the SPR. Last November — when prices first started to rise — it authorized a 32 MMbbl exchange in which barrels would be released by the end of April but would need to be returned to the SPR during fiscal 2022-24. Then, a 30 MMbbl withdrawal was announced shortly after Russia’s invasion of Ukraine in late February. Finally, on March 31, President Biden said the U.S. would release another 180 MMbbl of crude from the SPR over six months, or about 1 MMb/d, as we discussed in I Want to Break Free.

A few days after Biden’s announcement, the International Energy Agency (IEA) said it would release 120 MMbbl from emergency reserves (about 88 MMbbl of crude oil and 32 MMbbl of refined products) over six months through contributions from 19 countries, including 60 MMbbl of oil from the U.S. (Those barrels were part of the 180 MMbbl release announced by Biden.) The IEA estimated that about 240 MMbbl of emergency stocks (oil and products) would be added to the market over the next six months — an average of about 1.3 MMb/d. (That estimate did not include the release of 62.7 MMbbl of crude oil and refined products that was announced by the IEA on March 1, which included the 30 MMbbl of U.S. oil that was noted earlier.)

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