March 25, 2020 [Benzinga – Published on March 20, 2020] – Oil prices pulled back steeply to an 18-year low Wednesday, settling the session at $20.37, although the commodity has made a modest recovery since then.

 
The commodity has seen weakness from a one-two punch: a slowing global economy that translates to reduced oil consumption and wrangling between Russia and Saudi Arabia over production cuts to steady the slide in prices.

The Department of Energy said in a Thursday release that it plans to fill the Strategic Petroleum Reserve to capacity by purchasing 77 million barrels of American-made crude oil. The decision was made at the behest of President Donald Trump, according to the Department of Energy.

As part of the initiative, the energy department initially called for a purchase of 30 million barrels of sweet and sour oil, with the focus on small- to mid-size U.S. oil producers.

“DOE is moving quickly to support U.S. oil producers facing potentially catastrophic losses from the impacts of COVID-19 and the intentional disruption to world oil markets by foreign actors,” Energy Secretary Dan Brouillette said in a statement.

Trump revealed in a press conference March 13 that he intended to take advantage of rock-bottom prices and stock up on oil.

“We’re going to fill it right up to the top, saving the American taxpayer billions and billions of dollars,” the president said at the press conference.

The Nuts, Bolts Of The Strategic Petroleum Reserve

The SPR is the emergency crude oil supply established to deal with supply disruptions. The SPR was first established in December 1975 under the Energy Policy & Conservation Act signed by President Gerald Ford.

The SPR can hold up to 727 million barrels of oil.

It is stored in underground salt caverns at four sites along the Texas and Louisiana Gulf Coast, which has the largest concentration of U.S. refineries.

The SPR is filled either by direct purchases from the open market.

The government previously had a royalty-in-kind program that fetched the U.S. government royalty oil from operators who lease federally owned Outer Continental Shelf property, paying up to 12.5-16.7% of oil produced from the leases. The government has since then ended the program.
 

When Stockpiles Are Drawn

Drawdowns of oil from the SPR are made under emergency at the behest of the president. This is generally termed as an emergency release.

Normal sales are authorized to respond to supply disruptions of less magnitude or to raise revenues. Oil is also released from the SPR under exchange agreements with private companies, which are required to repay in kind within a definite timeframe and with additional premium barrels.

Emergency releases mandated by the president have occurred only three times in the past. The first instance was in 1991 at the start of the Operation Desert Storm in the Persian Gulf.

The second instance was in September 2005 in the aftermath of Hurricane Katrina, which ravaged oil installations and industries in the Gulf of Mexico region.

The third time an emergency release was done was in June 2011, when the U.S. was required by the International Energy Agency to release 30 million barrels of oil following supply disruptions in Libya and other countries.

Once the president orders a release, the energy department can conduct a competitive sale through contract awards and begin delivering oil within 13 days.

The reserve can release oil at a rate of 1 million barrels per day for about a year-and-a-half, and a maximum of 4.4 million barrels per day can be released a single day.

————-