SPR drawdown fetches discounted crude prices

  • Market: Crude oil
  • 04/22/22

The majority of crude sold in the latest emergency drawdown from the US Strategic Petroleum Reserve (SPR) sold at a discount to regional benchmarks, highlighting concerns that the White House's plan to release an additional 1mn b/d over the next six months may inundate the market with too much supply.

The US Department of Energy (DOE) released further details of the most recent SPR sale today, revealing that only 2.825mn bl, or 9pc, of the 30mn bl total sold was transacted at a premium to the benchmark it was priced against.

A combined 3.7mn bl of Bayou Choctaw Sweet sold at a 38¢/bl volume-weighted average discount to the Argus WTI Houston pipeline index, with individual deals ranging between a 66¢/bl discount and a 25¢/bl premium.

Pipeline deliveries of West Hackberry Sour sold at discounts to the Argus Mars volume-weighted average between $2.39/bl and 21¢/bl, for a volume-weighted average discount of $1.48/bl. Big Hill Sour sold at discounts to Mars between $1.76/bl and 1¢/bl for a volume-weighted average discount of $1.12/bl. Ex-pipe Bryan Mound Sour meanwhile sold between a 38¢/bl discount to Mars and an 18¢/bl premium, reflecting a volume-weighted average 14¢/bl higher than the Argus sour benchmark.

Another 7.5mn bl of sour crude will be delivered onto a vessel, representing 25pc of the total SPR sales volume.

A combined 5.15mn bl of Bryan Mound Sour for waterborne delivery at the Freeport terminal sold at discounts to Mars between 13¢/bl and $2.98/bl, reflecting a volume-weighted average discount of $2.04/bl.

TotalEnergies' Atlantic Trading division bought 1.25mn bl of Big Hill Sour crude for delivery onto a vessel at the Sun Nederland terminal for an average $1.25/bl discount to the Argus Mars volume-weighted average, while ExxonMobil will take 1.1mn bl of waterborne West Hackberry Sour at an average $1.75/bl discount to Mars.

The DOE sale represents the second such drawdown from the SPR in recent months, with deliveries for both sales expected to begin in May.

The DOE plans to issue a third notice of sale on 24 May for an additional 40mn bl of crude, with deliveries starting in June, as part of a larger initiative the President Joe Biden administration has launched to release around 1mn b/d of additional supply to the market over the next six months to help cool down energy prices amid the conflict in Ukraine.

The US plans to release a total of 180mn bl of crude from the SPR this year, with at least 60mn bl of that being contributed to an even larger IEA-coordinated global crude draw of 182.7mn bl.

But the US refining sector has vocalized concerns over Biden's ambitious plans to lower crude prices, citing possible infrastructure constraints that could lead to bottlenecks.

The SPR has a maximum drawdown capability of 4.4mn b/d, but weekly withdrawals have never exceeded 864,000 b/d since withdrawals started in 1985, according to federal data. The SPR's ability to add incremental crude to the market has declined over the last decade, as the shale oil boom increased utilization of nearby pipelines and marine terminals along the US Gulf coast, a 2016 review by the US Energy Department found. SPR sale bidders are customarily responsible for arranging transportation.

The onslaught of additional sour crude volume in the market is expected to push more US Gulf medium sour Mars into the export market as regional refiners pick up discounted crudes from the SPR. But despite the extra volume, Mars' spot price has surged by $4.48/bl since the beginning of the May trade month to a four-month high at a $1.18/bl premium to the Nymex light sweet crude futures contract yesterday amid global demand for alternatives to Russian medium sour Urals crude.

Getting the 1mn b/d of SPR crude to other US markets could run into other limits. The administration said it plans to "promptly process" requests for waivers from Jones Act shipping restrictions to transport crude from the SPR to other US ports, if there are shortages of qualified US-flagged tankers to carry crude to market, a senior administration official said. The administration has set a goal of providing responses to waiver requests within two days.

SPR sale results$/bl
GradeTotal volumeBasis Lowest price (diff)Highest price (diff)VWA diff
Pipeline deliveries
Bayou Choctaw Sweet3.7mn blWTI Houston-0.660.25-0.38
Big Hill Sour7.4mn blMars-2.00-0.01-1.12
Bryan Mound Sour2.85mn blMars-0.380.630.14
West Hackberry Sour8.5mn blMars-2.00-0.21-1.48
Vessel deliveries
Big Hill Sour1.25mn blMars-1.50-1.00-1.25
Bryan Mound Sour5.15mn blMars-2.98-0.13-2.04
West Hackberry Sour1.1mn blMars-1.95-1.55-1.75

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