President Joe Biden announced on Tuesday that the administration will tap the Strategic Petroleum Reserve as part of a global effort by energy jobs-consuming nations to slow the rapid rise in fuel prices that is expected in 2021. The coordinated release by the United States, India, China, Japan, the Republic of Korea, and the United Kingdom is the first of its kind.
The United States will withdraw 50 million barrels from the SPR. Of that total, 32 million barrels will be exchanged over the next few months, while 18 million barrels will be sold sooner than planned.
Following the announcement, US oil fell 1.9 percent to a session low of $75.30 per barrel before recovering and moving into positive territory. The contract was last trading at $78.67 per barrel, up 2.5 percent. Brent crude was trading at $82.31 per barrel, up 3.2 percent from the previous day. Rebecca Babin, a managing director at CIBC Private Wealth US, noted that a release was “well-telegraphed” and therefore already priced into the market.
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“Positioning across the crude complex has been drastically reduced over the past couple of weeks as traders lock in profits ahead of year-end reducing the initial reaction,” she added. Crude prices have pulled back after U.S. oil and Brent rose to their highest levels in seven and three years, respectively, in October.
The announcement on Tuesday comes after the administration has been saying for months that it was looking into the tools at its disposal as West Texas Intermediate crude futures hit a seven-year high above $85. Pump prices have risen in lockstep with the market, and are now nearing their highest level in seven years. According to AAA, the national average for a gallon of gas was $3.409 on Monday, up from $2.11 a year ago. According to AAA, crude prices account for between 50% and 60% of what consumers pay to fill up their gas tanks.
“The President stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic,” the White House said in a statement.
According to the Department of Energy, the SPR held 604.5 million barrels spread across four sites as of Nov. 19. According to the department, it takes 13 days for the oil to reach the market following a presidential announcement. The SPR, which was established in 1975 following the oil embargo, has a total capacity of 727 million barrels.
According to the DOE, the SPR can be tapped in three ways: a full drawdown to counter a "severe energy interruption," a limited drawdown of up to 30 million barrels, or a drawdown for an exchange or test sale.
“This is a well-timed move to try and lower oil prices,” John Kilduff, partner at Again Capital, said after the announcement. “This added supply should help to bridge the production shortfall ahead of winter, especially if we get confirmation of meaningful supply, as well, from several of the major Asian consuming nations.”
In the face of rising energy prices, the Biden administration urged OPEC and its oil-producing allies to increase output in August. However, the group decided to stick to its previously agreed-upon production increase of 400,000 barrels per month.
As the pandemic sapped demand for petroleum products, the group made the unprecedented decision in April 2020 to withdraw nearly 10 million barrels per day from the market. Other producers, including the United States, reduced output as oil prices plummeted to never-before-seen lows. Since then, demand has recovered while producers have been slow to return oil to the market, which has pushed crude to multiyear highs.
