Depleting America's Oil Reserve Was Simple; Replenishing It Will Be Difficult.

It took less than a year to draw 180 million barrels of oil out of the U.S. Strategic Petroleum Reserve. However, it is estimated that it will take significantly longer to replace those barrels, if it happens at all.

The U.S. Energy Department is pivoting toward a refill of the Strategic Petroleum Reserve (SPR), after President Biden authorized a historic emergency release last year. With only 372.4 million barrels left in the SPR as of Dec. 30 (the lowest level in 39 years), the DOE is taking baby steps, starting with a 3-million-barrel pilot program. Under this program, the agency would offer market participants a fixed price for future delivery. This is a new approach for the DOE, which has typically purchased for more immediate delivery. The idea is to use the fixed-price contracts as a carrot for U.S. oil producers to invest in production.

The carrot might not be all that enticing, though. The White House has indicated that it plans to repurchase crude oil for the SPR when West Texas Intermediate crude oil prices are at or below $67-72 a barrel. That number applies to both current delivery and future delivery. In a November interview on Bloomberg TV, Amos Hochstein, the State Department’s energy envoy, clarified that the DOE will start buying back barrels when “prices get to somewhere in the $70 range on a consistent basis.”

If the administration wants to take advantage of a good buying opportunity, they should act now: WTI crude is trading around $74 a barrel today. Waiting around to sign future delivery contracts at the $70-a-barrel range could prove trickier.

Bob McNally, president of Washington, D.C.-based consulting firm Rapidan Energy Group, is skeptical that producers will be able to sell contracts for delivery further out than one year. He notes that while some producers do sell contracts up to one year out as a hedge, it is rarer for them to lock in prices for further-out delivery.

The point at which WTI prices fall below $70 a barrel is October 2024, 21 months out. In order to attract more interest, the DOE might have to offer a higher purchase price. In fact, Bloomberg reported Friday that the Biden administration is delaying the replenishment of the SPR because the offers it received are either too expensive or didn’t meet required specifications.

A spokeswoman for the Department of Energy confirmed that the agency will not be buying crude oil for the February delivery window. "DOE will only select bids that meet the required specifications and that are at a price that is a good deal for taxpayers," the spokeswoman said in an email.

Another question is whether the DOE has enough funding to fill the SPR to the brim. Through last year's emergency release, the government sold 180 million barrels at around $96 a barrel, implying $17.3 billion in proceeds. However, some $12.5 billion was stripped away for Congressional use in the latest spending bill, according to Kevin Book, managing director at ClearView Energy Partners. This is because Congress needed to make up for the funding shortfall that was created when it canceled 140 million barrels worth of mandated SPR sales for fiscal years 2024 to 2027.

This leaves the Department of Energy (DOE) with roughly $4.8 billion of purchasing power. Even if the DOE does manage to refill at $70 a barrel, that implies an Strategic Petroleum Reserve (SPR) top-up of less than 70 million barrels, which would only take the SPR back up to 440 million barrels, the amount it had in 1984. On a finer accounting point, Congress left intact 26 million barrels worth of mandated SPR sales this fiscal year but there are also around 25 million barrels that need to be returned to the SPR through its exchange program by the end of fiscal year 2024—so those barrels effectively cancel each other out.

What would it take for the Department of Energy to refill the Strategic Petroleum Reserve? One option is for Congress to direct funding toward the SPR Petroleum Account. However, this seems unlikely since there doesn't appear to be much political will to direct funds toward the SPR, according to Mr. Book. Another possibility is a major downturn that severely reduces oil prices.

Oil-industry analysts generally agree that the 180-million-barrel emergency release last year helped relieve upward pressure on oil prices. The White House was using the $70-a-barrel purchase intention in the hope that it would put a floor on oil prices to motivate future production. However, the DOE's depleted wallet for SPR refills means that the floor probably won't be very effective. "The $70-a-barrel floor doesn't exist anymore, really," said Ilia Bouchouev, managing partner at Pentathlon Investments and former head of oil derivatives at Koch Supply and Trading.

It seems more likely that the SPR will be left leaner for quite some time, creating a new normal. With European sanctions on Russian petroleum-product imports still a month away and China beginning to reopen, that cushion could be useful.