US leads oil release with 50mn bl from SPR: Update 2

Updates with changes throughout

President Joe Biden has ordered the US to draw down up to 50mn bl of crude from its Strategic Petroleum Reserve (SPR), as part of a global push by oil-consuming countries to lower fuel prices that have surged to seven-year highs.

The US will offer long-term loans of up to 32mn bl of sour crude from its SPR for delivery by 30 April, while separately selling 18mn bl of sour SPR crude outright over the next "several months," it says. India intends to release 5mn bl of crude from its strategic stocks at an unspecified time, while the UK authorized companies to "voluntarily" release the equivalent of up to 1.5mn bl of oil held in reserves.

China, Japan and South Korea plan to join the global effort, but they have yet to release details on potential drawdowns. Biden has been working to negotiate the coordinated oil release, based on concerns that supply has not kept pace with a surge in demand as the world economy recovers from the Covid-19 pandemic.

"While our combined actions will not solve the problem of high gas prices overnight, it will make a difference," Biden said. "It will take time, but before long you should see the price of gas drop where you fill up your tank."

But markets appear to have expected a larger drawdown of crude from strategic reserves. Ice Brent front-month January crude futures at 19:32 GMT were trading at $82.03/bl, up by $2.33/bl from its last settlement.

The White House earlier in the day touted a 10pc decline in WTI crude prices since late October as the result of Biden's weeks of effort to coordinate the global crude release. But by the afternoon, the Nymex WTI front-month contract had risen by $1.62/bl to $78.37/bl.

Biden today separately reiterated his complaints that the recent drop in wholesale gasoline prices are not being passed along to consumers, which he has asked the US Federal Trade Commission to investigate.

"If the gap between wholesale and retail [gasoline] prices were in line with past averages, Americans would be paying at least 25¢/USG less right now," Biden said.

The Opec+ group is unlikely to change output policy as a result of the coordinated release, when it meets on 2 December to set January crude quotas, delegates told Argus today.

The White House has repeatedly said its preference would be for Opec+ to increase output, and a senior administration official said the "hope and expectation" is that Opec+ will stay on course to increase monthly production by 400,000 b/d.

The coordinated crude releases mark the emergence of an "anti-Opec+" that will create an artificially looser energy market, consulting firm Rystad Energy said. But those market dynamics are unlikely to last more than a couple of months and could shift if Opec+ responds to the release by slowing planned production increases.

"The million dollar question is how Opec+ may respond to this move," Rystad head of oil markets Bjornar Tonhaugen said.

US crude mostly on loan

The release of sour crude from the US SPR will occur in two tranches and start as soon as next month. Biden is prepared to take "additional action," the White House said. Biden has the authority to release a further 60mn bl of crude, by making an emergency drawdown from the SPR.

The US Energy Department in the first tranche of crude from the SPR intends to offer long-term loans, or "exchanges," of 32mn bl during the first four months of 2022, with the option for early deliveries in late December 2021. Successful bidders will return the crude from 1 July 2022-30 September 2024, along with an in-kind payment as compensation.

If companies choose to bid on the SPR exchange, they will need to return an in-kind premium of crude as low as 2.3pc of the borrowed volume, if crude is returned by 1 July-30 September 2022. The in-kind premium will reach as high as 9.1pc for crude that is returned by 1 August-30 September 2024. Bids are due by 6 December and contracts will be awarded no later than 14 December.

For the second tranche of crude from the SPR, the administration will accelerate the sale of 18mn bl that the US Congress already required to be sold in fiscal years 2022-2025. The US plans to release a notice of sale by 17 December at the earliest, but it did not provide a timeline for the likely drawdown.

India has not provided details on the timing of its 5mn bl release. The UK said its release of up to 1.5mn bl of oil would support the global economic recovery.

"This will be voluntary, not mandatory," the UK said. "If all companies chose to use this flexibility it would release the equivalent of 1.5mn barrels of oil."

US state gasoline tax holiday

The more than $1/USG rise in retail US gasoline prices this year has pressured states to consider giving drivers temporary relief, possibly by removing excise taxes on fuel.

Florida governor Ron DeSantis (R) on 22 November said when the state's legislature reconvenes in January, he will ask it to "basically zero out" the state's 26.5¢/USG taxes on gasoline on a temporary basis. The projected $1bn gas tax holiday will save the average driver $200, his office said.

State-imposed taxes and fees averaged 30.6¢/USG for gasoline and 32.3¢/USG for diesel as of July, according to the US Energy Information Administration. Any state tax holidays will not affect the collection of federal excise taxes set at 18.4¢/USG for gasoline and 24.4¢/USG for diesel.

But temporarily suspending fuel taxes will also starve states of funding to maintain roads and highways. The US Congress weeks ago enacted a bipartisan $1 trillion bill that would substantially increase federal funding for road work, but states are still required to pay a portion of those costs.

By Chris Knight, Ruxandra Iordache and Sathya Narayanan