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What is the SPR, the emergency oil stash Biden may tap?

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What is the SPR, the emergency oil stash Biden may tap?
© Reuters. FILE PHOTO: A maze of crude oil pipes and valves is pictured during a tour by the Department of Energy at the Strategic Petroleum Reserve in Freeport, Texas, U.S. June 9, 2016. REUTERS/Richard Carson

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By Timothy Gardner

WASHINGTON (Reuters) -The Biden administration is considering tapping the U.S. Strategic Petroleum Reserve (SPR) to cool oil prices in conjunction with other big consumers like China and Japan.

Such a move may not have a long-term impact on dampeningU.S. oil prices that hit a seven-year high https://www.reuters.com/business/energy/oil-prices-rise-with-few-us-government-brakes-available-2021-11-09 above $85 a barrel in late October, analysts say.

Releasing oil could allow the Biden administration to fendoff criticism ahead of the 2022 midterm elections that it hasdone little to counter rising prices. By moving in tandem withother big consumers like China and Japan, it could also allowBiden to say he took action after Saudi Arabia and Russia,members of the OPEC+ production group, resisted U.S. calls topump more oil into global markets.

Here are the issues surrounding using the SPR.

WHY WAS THE SPR CREATED?

The United States created the SPR in 1975 after the Arab oilembargo spiked gasoline prices and damaged the U.S. economy.Presidents have tapped the stockpile to calm oil markets duringwar or when hurricanes hit oil infrastructure along the U.S.Gulf of Mexico.

HOW MUCH OIL DOES THE SPR HOLD?

The reserve currently holds about 606 million barrels indozens of caverns in four heavily guarded locations on theLouisiana and Texas coasts. That’s enough oil to meet U.S.demand for more than a month.

The country also maintains small and gasolinereserves in the U.S. Northeast.

WHAT OTHER COUNTRIES HAVE STRATEGIC RESERVES?

Besides the United States, the other 29 member countries inthe International Energy Agency (IEA), including the United Kingdom, Germany, Japan and Australia, are required to hold oil in emergency reserves equivalent to 90 days of net oil imports.Japan has one of the largest reserves after China and the UnitedStates.

China, an associate member of the IEA and the world’ssecond-leading oil consumer, created its SPR 15 years ago andheld its first oil reserve auction https://www.reuters.com/world/china/china-tests-oil-clout-battles-inflation-with-first-oil-reserve-auction-2021-09-15 in September. Another IEA associate member, India, the third-biggest oil importer and consumer, also maintains a reserve https://www.reuters.com/world/india/exclusive-india-starts-selling-oil-strategic-reserves-after-policy-shift-2021-08-17.

Overall, OECD governments held more than 1.5 billion barrels of crude as of September, according to the IEA. That is about 15 days of global demand prior to the pandemic.

CAN THOSE COUNTRIES RELEASE OIL ALL AT ONCE?

U.S. presidents can coordinate a SPR release with drawdownsin reserves by other IEA members at the same time. A potentialrelease involving China and India would be the first instance inwhich the U.S. coordinated a release that included those twonations.

HOW DOES THE SPR GET OIL TO MARKET?

Because of its location near big U.S. refining orpetrochemical centers, the SPR can ship as much as 4.4 millionbarrels per day. It can take only 13 days from a presidentialdecision for the first oil to enter the U.S. market, accordingto the Energy Department.

Under a sale, the Energy Department usually holds an onlineauction in which energy companies bid on the oil. Under a swap,oil companies take crude but are required to return it, plusinterest.

U.S. presidents have authorized emergency sales from the SPRthree times, most recently in 2011 during a war in OPEC memberLibya. Sales also took place during the Gulf War in 1991 andafter Hurricane Katrina in 2005.

Oil swaps have taken place more frequently, with the lastexchange held in September after Hurricane Ida.

WHAT IS THE IEA’S ROLE IN NATIONAL SPRs?

The IEA helps coordinate member releases, provides data on levels and plays other roles.

There are typically three ways to maintain SPR levels to meet the 90-day requirement, according to the IEA website: commercial stocks held by refiners, those held by the government and agency stocks, with countries choosing which balance to maintain. The stockholding structure is peer-reviewed every five years among members.

Measures to restrain demand or otherwise help supply can also be taken, the IEA says. These may include calls for voluntary fuel savings, fuel-switching such as oil to gas for power generation or “surge production” to quickly tap underground reserves.

Relaxing environmental standards can also help make supplies more flexible, the IEA says.

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U.S. increased forecasts for crude oil and natural gas production in the country in 2022

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Crude oil and natural gas production will be raised. The U.S. Energy Department raised its 2022 domestic crude oil production (excluding other liquid hydrocarbons) forecast from 11.83 million to 11.87 million barrels per day, the Energy Information Administration (EIA) said in its monthly forecast. The forecast is 0.62 million bpd higher than the 2021 result.

The agency also slightly increased its 2023 production forecast by 30,000 bpd, to 12.34 million bpd. It is close to the annual average. This figure is close to the average annual record for oil production in the United States, set in 2019, – 12.3 million bpd.

Also, the Department of Energy slightly raised its 2022 and 2023 U.S. gas production forecasts. Gas production will be 98.13 Bcf/d in 2022 and 100.38 Bcf/d in 2023 (nearly 1.2 trillion cubic feet of gas per year).

The previous forecast had assumed production of 98.07 and 99.69 Bcf/d, respectively. In 2021, the country produced 94.6 Bcf/d of gas.

While the EIA still expects gas production in the Permian Basin to be constrained in early 2023, it anticipates that these constraints will be removed sooner than previously projected, although risks remain.

The Department of Energy expects natural gas prices to rise from their November level of $5.5 per MMBtu to over $6 per MMBtu in Q1 2023 because of both higher winter demand for natural gas and increased LNG exports. This will impact crude oil and gas prices.

U.S. LNG exports are expected to be 10.6 Bcf/d in 2022, up from 10.85 Bcf/d a month ago, and rising to 12.25 Bcf/d in 2023 (nearly 145 Bcf/d); the previous forecast of 12.33 Bcf/d.

Earlier we reported that the Expert revealed the reason for the sharp fall in oil prices.

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The expert revealed the reason for the crude oil price chart dump

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World oil prices have fallen to the level of early January, as expectations of a sharp decline in oil supplies from Russia after the start of the embargo and more aggressive actions by OPEC+ to maintain prices have not materialized. This is the reason for the crude oil price chart dump.

Live crude oil price in dollars – what’s going on?

On Wednesday, Brent crude oil prices fell below $78 a barrel for the first time since January 3. February futures are trading at $79.6 a barrel.

Prices were probably driven by expectations of a sharp drop in oil supplies from Russia due to the embargo, and more aggressive action by OPEC+ to maintain prices; i.e., production cuts. Neither of these things happened; OPEC+ decided on Sunday not to change its production quota and, judging by media reports, Russian companies prepared for the embargo, including tanker fleet acquisitions.

Meanwhile, the Financial Times newspaper reported on Monday, citing oil traders, intermediaries and vessel-tracking services, that a traffic jam of oil tankers has formed off the Turkish coast since the start of restrictions on oil prices from Russia due to Ankara’s requirements to provide insurance data. According to the expert, a delay in the passage of ships could have led to an increase in oil prices on expectations of a shortage, but this has not happened yet.

According to marinetraffic, a ship-tracking portal, there are about 30 tankers, mostly Turkish, off the Turkish coast near the strait. Five tankers out of this number are Russian. Russia is concerned about the situation off the coast of Turkey, where Russian oil tankers have piled up; this problem is now being discussed through transport and insurance companies. but it may also be taken up at a political level.

Western oil sanctions came into effect on December 5: The European Union stopped accepting Russian oil transported by, and so also the “Big Seven” countries. Australia and the EU, imposed a price cap on such oil at $60 per barrel. Deputy Prime Minister Alexander Novak said Sunday that Russia is considering possible mechanisms to ban the application of the price ceiling for Russian oil supplies.

Earlier, we reported that oil prices fell before the release of statistics on inventories in the U.S.

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Crude oil prices today declined before the release of U.S. inventory statistics

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World oil prices on Wednesday afternoon moved to some decrease, according to trading data. Markets are waiting for weekly statistics on commercial oil reserves in the U.S.

Brent crude oil prices were down 0.67% to $78.82 per barrel, while WTI January futures decreased 0.67% to $73.75. Oil prices were weak in the morning.

Later Wednesday, the U.S. Department of Energy will report data on the country’s commercial oil inventories for the week through December 2. Analysts believe the figure fell by 3.3 million barrels. On Wednesday night, the American Petroleum Institute (API) said it estimates a 6.4 million-barrel decline in inventories.

Crude oil prices today continue to be affected by uncertainty regarding the prospects of oil supplies. From December 5, the oil sanctions of the West came into effect: the European Union stopped accepting Russian oil transported by sea; also the G7 countries. Australia and the EU imposed a price cap on such oil at $60 per barrel.

The Russian authorities are developing three possible responses. The first one is a complete ban on sales to the countries that supported the restriction, including through intermediary countries or even their chain; the second one is a ban on exports under contracts that include a price ceiling condition; and the third one introduces an indicative price – the maximum discount of Russian Urals oil to the benchmark Brent grade, and a ban on selling at a higher discount.

Earlier we reported on the Big Tanker Jam in the Bosphorus due to the price cap on Russian oil.

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