Gibson: Drawdown on US Strategic Petroleum Reserves ‘will exceed previous records and test infrastructure bottlenecks, including pipeline and terminal capacity’ (Source: US DoE/public domain)
April 11, 2022by Riviera News
Questions remain over whether U.S. strategic oil reserves can support delivering 1 million barrels per day (bpd) to the market and whether that move is good or bad for tankers, analysts say of the Gibson Shipbroking tanker market
As the sanctions effort intensifies against Russia, governments around the world are looking for ways to wean themselves off Russian oil, while managing the political damage caused by rising fuel prices.
Last week, in an effort to appease his electorate and support his European allies, President Biden announced that the United States would release 180 million barrels of crude from the Strategic Petroleum Reserve (SPR), alongside other releases other IEA member states (an additional 60 million barrels) over a six-month period. For the United States in particular, the release of 1 million bpd over six months effectively creates the equivalent of a short-term increase in domestic production, with barrels likely to be sold both on the domestic and overseas market.
Additional barrels will start coming to market from May, with the US Department of Energy asking for bids by April 12 with contracts awarded April 21. Previous releases have often been positioned as “loan”, meaning the SPR must be replenished by the buyer, but the latest sale does not have such a stipulation. The release appears to be having the intended effect, with first-month crude futures falling near US$100/barrel this week and spot crude differentials falling to the narrowest premiums seen since the invasion, so as buyers look at potential SPR barrels.
So the key question is, is this good or bad for tankers?
The first dependency is, what impact will the SPR release have on exports? Flows are almost certainly set to increase, especially as Europe tries to replace Russian oil, although the magnitude of this is uncertain. Slightly more than half of the crude stored in the caves is mostly a medium-sour blend, well-suited to replacing the Urals, and will be popular both domestically and for export. Even if a limited number of barrels of SPR are made available for export, the release could push more light sweet shale crudes for export. There is also the question of whether the SPR can sustain a drawdown of 1M bpd. In theory, the combined withdrawal capacity is 4.4 Mb/d; however, this will surpass previous records and test infrastructure bottlenecks, including pipeline and terminal capacity.
Imports could also come under some downward pressure as domestic refiners maximize the supply of domestic stocks, although this impact is likely to be minimal, perhaps limited to around 200,000 bpd (the volume imported from Russia in 2021). This will likely be more than offset by increased exports, making the net gain beneficial to tanker markets.
In the longer term, however, it is assumed that some replenishment of the SPR will be required, albeit not to the extent it was previously replenished. Any future reconstruction of the SPR would divert barrels from exports and could limit US export growth in the future. There is also the question of the 60 million barrels coming from other members of the IEA. Japan and South Korea account for 37% of releases, making it highly likely that these barrels will compete with imports and offer little support to the tanker market.
Ultimately, at the macro level, US volumes are small, accounting for around 1% of global supply during the release period. The biggest winners over the six-month period will be tankers loading in the US Gulf, although the longer-term or overall benefit is likely to be marginal. Yet right now, especially with OPEC’s forecasted barrel rise in the Middle East, the US SPR release is setting a more positive tone in the tanker market, at least in the near term.
