The US oil release could have been more strategic

With OPEC and its Russian-led allies sticking to their modest oil production plan, the White House is taking matters into its own hands. It’s going big this time.

On Thursday it said it would announce the release of 1 million barrels per day (about 1% of global demand) from the Strategic Petroleum Reserve over the next six months, or 180 million barrels in total – the largest in its history. The announcement follows a quick meeting on Thursday of members of the OPEC+ cartel, which decided not to increase its overall production beyond the 432,000 barrels per day increase planned for May.

The Biden administration’s final wording leaves a lot to be desired: it could have said, for example, that it will authorize a release of 1 million barrels per day for 30 days, with an option to repeat this five more times. Given that even the possibility of an SPR release may be enough to calm prices down, playing his cards closer to his vest would have left that option open going forward. Flexibility also makes sense given that it is not entirely clear how much Russian oil supply will be withdrawn from the market and for how long. The International Energy Agency earlier this month estimated that 3 million barrels a day of Russian oil production could be shut down over the next month. Data compiled by OilX shows that Russian oil production was down a moderate 280,000 barrels per day on March 27 compared to early March.

Brent crude prices fell 5% to $105.96 a barrel following media reports of the SPR plan, but rose to $108.12 a barrel following the White House announcement. Past experience has shown that such price effects are short-lived. Such was the case according to two recent SPR releases: Retail gasoline prices fell for a few weeks after the November 19 announcement, but then rose sharply thereafter. Gasoline prices continued to rise after the March 1 announcement, although they fell in mid-March after Russia-Ukraine talks and Covid-19 lockdowns in China.

Withdrawing another 180 million barrels from the SPR, which is already somewhat depleted after two recent drawdowns, could leave around 300 million barrels in reserve, according to RBC Capital Markets calculations. This does not leave an effective cushion. As International Energy Agency member countries are required to hold 90 days of net import coverage in reserves, the US must hold 315 million barrels, the RBC report said. The obvious concern about such a large drawdown is that the market’s attention could shift to an imminent loss of this shock absorber. As much as the world hopes for additional production from the Organization of Petroleum Exporting Countries, there is only 2 to 2.5 million barrels per day of additional reserve capacity in the group, according to RBC.

Additionally, a release might do little to ease market pressure given the SPR’s location in Texas and Louisiana. While inventories of crude oil are consistently low, they are still within their five-year range along the Gulf Coast, according to US Energy Information Administration data. Bottlenecks exist in places like the Midwest and East Coast. There are transportation bottlenecks to get oil from the Gulf Coast to these other hubs. Perhaps a more effective, if not politically popular, move would have been to break down these barriers — such as suspending the Jones Act, which regulates shipping between domestic ports — to make it easier to move petroleum products from one place to another.

Given the uncertainties surrounding the invasion of Ukraine, the US is playing a weak hand.

Russia’s attack on Ukraine helped push oil prices above $100 a barrel for the first time since 2014. For example, rising oil prices could further fuel inflation across the US economy. Photo illustration: Todd Johnson

write to Jinjoo Lee at jinjoo.lee@wsj.com

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