Analysis: SPR Releases Set to Slow as Hurdles Mount


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- More than 97% of the 133.5 million bbl of crude awarded to 
companies from the Strategic Petroleum Reserve (SPR), have been released, 
emphasizing how quickly the emergency stockpile has been drawdown. The U.S. 
Energy Information Administration reported on Wednesday (9/2) that another 1.3 
million bbl were released last week, leaving only a small portion available to 
the market.

   Although the Trump administration's commitment to releasing a total of 172.2 
million bbl, large scale drawdowns may be unlikely to continue for long, given 
the lack of demand and growing logistical hurdles as volumes in storage are 
approaching operational minimums.

   This year's emergency reserves release came in form of loans, with companies 
agreeing to return 1.2 to 1.24 bbl of crude oil for every barrel received. A 
total of 133 million bbl was awarded in the first three months of bidding, 
according to the EIA. The latest round in June, however, saw the allocation of 
only 500,000 bbl of the 40 million bbl on offer, as softening crude oil 
fundamentals, plentiful domestic supply and bearish price outlooks have made 
these high interest loans less attractive.

   The lower the fill level, the harder it becomes to drain the salt caverns of 
their remainder crude. At 286.6 million bbl, volumes in the SPR have fallen 
into a range that is forcing a slowdown in operations. The drawdown rate has 
dropped from 1.19 million bpd in May and June to 576,000 bpd in July and 
August, well below the estimated effective rate of 2.7 million bpd.

   The current maximum drawdown rate has already been stymied by outages and 
maintenance issues and represents just 61% of the designed capacity. Inadequate 
maintenance has also left parts of the emergency reserve completely 
inaccessible. Some 90 million bbl housed in the Big Hill storage facility in 
Winnie, Texas, are effectively locked in following a construction outage, 
meaning less than 200 million bbl of crude in the SPR is even in theory 
accessible, according to U.S. Government Accountability Office data. 

   Caverns cannot be fully emptied, either. Releasing the last batch of around 
38.7 million bbl would bring stocks below the 250 million bbl mark widely 
regarded by experts as the minimum fill level needed to ensure safe operations.

   Given these factors, crude oil emergency stockpiles, while still plentiful 
on paper, in practice have not much of a cushion left to provide.

   SPR releases have until late July feathered what would have been an even 
steeper fall in commercial inventories amid the highest domestic crude demand 
in seven years and record-high exports.

   Receding international demand amid easing supply disruptions and global 
crude oil demand destruction allowed for a counter-seasonal recovery in August, 
with exports and inventory levels falling back in line with year-ago levels.

   During this period, commercial crude oil inventories expanded by 17.47 
million bbl, while SPR volumes declined by 18.3 million bbl. The prospect of 
and end to large scale SPR releases, combined with softening demand both at 
home and abroad, may turn out to be the saving grace for commercial inventories.

    




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