US releases buyback plan for refilling SPR

President Joe Biden's administration has released a plan for refilling the US Strategic Petroleum Reserve (SPR) in "future years" through a series of crude purchases intended to offer a long-term price signal for investment in production.

The US Energy Department said it will call for bids this autumn for companies to sell it 60mn bl of crude to inject into the SPR, but with a delivery window that will be set based on when "future oil prices and demand are expected to be significantly lower." That sale structure will secure contracts to refill the SPR and encourage production in the short-term by offering guaranteed future demand, the agency said.

"As we are thoughtful and methodical in the decision to drawdown from our emergency reserve, we must be similarly strategic in replenishing the supply so that it stands ready to deliver on its mission," US energy secretary Jennifer Granholm said.

The upcoming 60mn bl purchase is meant to be the "first tranche" of purchases to replenish the SPR, the agency said, after Biden announced plans in late March to withdraw 180mn bl from the reserve. The SPR at the end of last month held 550mn bl of crude, but inventories could drop below 400mn bl later this year if Biden is able to sustain his targeted 1mn b/d withdrawl over a six-month period.

The Energy Department, as part of its crude repurchase plan, intends to issue a rule so that it can buy crude to refill the SPR through a competitive "fixed-price bid process" as an alternative to an existing index-based bidding process, under which the final crude sale prices is adjusted based on index prices close to the time of delivery. Because the administration wants to buy crude for delivery possibly years from now, a fixed-price contract could limit uncertainty over how much refilling the SPR will cost, or what price producers or traders can expect to receive.

The Biden administration intends to pay for refilling the SPR based on revenue it is raising from emergency sales of crude. The administration over the past two months has already sold more than 60mn bl from the SPR at prices ranging from $91.71/bl to $111/bl. The administration plans to sell another 40mn bl of crude later this month.

Nymex WTI crude futures for delivery in the second half of 2023 settled at an average price of $85.95/bl as of 4 May, while prices for delivery throughout 2024 averaged $79.45/bl. The administration has not offered specifics on how it will determine when to set the delivery date or what price it is targeting.

By Chris Knight