US aims to boost oil production by filling emergency crude stockpiles

US aims to boost oil production by filling emergency crude stockpiles

The Biden administration has outlined plans for what amounts to a 60 million barrel spread trade in oil markets, buying back crude at lower prices to replenish supplies sold from the US government’s emergency stockpile this year. for over $100 a barrel.

The Department of Energy’s plan for the Strategic Petroleum Reserve would serve a dual purpose: to add barrels for future supply emergencies while giving oil companies a signal to produce more.

The government has sold a record 180 million barrels of SPR crude oil this year in a bid to reduce fuel prices which have surged due to high demand and shortages linked to oil embargoes and sanctions against Russia. . Last week, the reserve contained 550 million barrels.

On Thursday, the Energy Department began outlining how it would begin to replenish the reserve, established after the energy crises of the 1970s. The agency said it would solicit offers to buy back 60 million barrels of crude from the fall 2022, the first in a series of purchases. The future delivery window would “likely” occur after the federal fiscal year that ends in September 2023, the department said.

The agency said it will use future purchases to counter sharp price declines in hopes of giving oil producers and their shareholders the confidence to invest in drilling.

The government’s buy-back strategy “will help encourage the production we need now to drive prices down this year by securing that demand in the future at a time when market participants expect crude oil prices to be significantly lower. to what they are today,” the Department of Energy said in the statement.

Some domestic oil producers have been hesitant to increase production even with high U.S. oil prices due to market volatility and significant “backsizing” in the futures market, in which the price of oil for years of delivery to from now is lower than the spot price.

Investors are also pressuring U.S. shale oil producers to use windfall gains from high oil prices to fund dividends and stock buybacks rather than making longer-term investments in drilling.

The spot price for West Texas Intermediate, the benchmark for U.S. crude, was $108 a barrel on Thursday, but the price of oil for December 2023 delivery traded at just $84 a barrel. For late 2024 delivery, the price is $76, according to futures trader CME Group.

The government’s two-step SPR strategy will “lower first-month prices and drive the back-end higher, providing market coverage and signals,” said S&P Commodities Insight analyst Roger Diwan.

Former President Donald Trump also attempted to use the Strategic Petroleum Reserve to support domestic producers at the start of the pandemic in March 2020, when collapsing demand sent prices plummeting.

Democrats in Congress have refused to fund the purchases.

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