Use of Strategic Petroleum Reserve may become less effective over time

Oil&Gas Materials 8 March 2023 11:25 (UTC +04:00)
Laman Zeynalova
Laman Zeynalova
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BAKU, Azerbaijan, March 8. The use of Strategic Petroleum Reserve (SPR) by the US is likely to become less effective over time if crude stocks continue to fall to critical levels, Trend reports with reference to the Oxford Institute of Energy Studies (OIES).

“In a clear departure from past behavior, the United States used the SPR as a tool to influence market balances and expectations in the wake of the Russia-Ukraine war. In 2022, the release of crude from the US SPR totaled 221 mbbls, even though the projected large disruptions in Russian supplies failed to materialize. But the impact goes beyond the release of physical volumes to the market. The US Administration used the SPR releases to signal its willingness to put a cap on the oil price which shaped market expectations in 2022. This could continue in 2023 with the US administration recently signalling that it is not ruling out further releases from the SPR nor any option to bring prices lower,” reads the latest OIES report.

The report reveals that an interesting development in 2022 has been the US Administration plan to buy crude to refill the SPR to ‘provide both certainty to industry that there is stable demand for increased production’ specifying a price range at or below $67-$72 per barrel, in effect trying to put a floor under the oil price.

“Also, for the first time, the US with its allies intervened directly in oil market pricing mechanisms by imposing a price cap on Russian crude in attempt to reduce Russia’s oil revenues. Though the effectiveness of the price cap in achieving its objectives remains subject to debate especially as it is difficult to assess the impact of the counterfactual scenarios with the embargo but without the price cap, the imposition and policing of the price cap has elevated uncertainty (and confusion) for oil exporters, shippers, insurers, traders, banks, and even financial players. Beyond the release of crude from the SPR, the behavior of US shale players and their output profile has also changed during this cycle,” the OIES analysts note.

The mantra of growing production at any cost fell out of favor and the focus has shifted towards improving returns, reducing debt, and returning money to shareholders through dividends and buybacks, reinforced by pressures from investors to maximize returns and not output.

Also, the cost structure of the US shale industry has moved higher. The environmental record of the US shale industry has also come under closer scrutiny impacting investment flows into the industry. The impacts of such shifts have been multi-fold: The lags between the increases in prices and increases in output are now longer especially as the US shale industry faces many bottlenecks and inflationary and cost pressures; The output increases in response to higher prices are more modest compared to previous cycles; The asymmetries have amplified with the output responses to price falls are likely to be larger and faster than output responses to higher prices.


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