Biden OKs $79.99/Barrel Cap to Boost US Oil Reserves

Key Takeaway

• Biden administration raises the price cap to $79.99 a barrel to refill US emergency oil reserves, signaling a shift towards more market-aligned strategies.
• New pricing rules aim to facilitate better hedging for bidders, reflecting adjustments for modern trading risks and volatility.
• The DOE plans to purchase 3.3 million barrels of sour oil, with bids due by May 14, as part of efforts to replenish near four-decade low reserves.

Strategic Petroleum Reserve Refill Initiated

The Biden administration has taken a significant step towards replenishing the United States' Strategic Petroleum Reserve (SPR) by announcing its intention to purchase up to 3.3 million barrels of crude oil in October. This move comes after a previous plan to buy oil was scrapped last month due to a spike in oil prices, which the Energy Department deemed not in the taxpayer's best interest. The decision to refill the SPR, now at its lowest level in 40 years following a record drawdown of 180 million barrels in response to Russia's invasion of Ukraine, marks a strategic approach to managing the nation's emergency oil stockpile amidst fluctuating global oil prices.

Oil Price Dynamics and SPR Strategy

Recent adjustments in oil prices, now around $78 a barrel and falling below the administration's targeted buying range, have presented a favorable opportunity for the government to act. This price movement is attributed to signs that the oil market is well-supplied and speculation around potential output increases from OPEC+. The administration has adopted a cautious approach to refilling the SPR, aiming to secure oil at prices that are advantageous for the taxpayer. Energy Secretary Jennifer Granholm highlighted the administration's strategy to "buy back and we want to buy at a rate that is good for the taxpayer," reflecting a prudent use of taxpayer funds in bolstering national energy security.

Adjustments in Purchase Strategy

In a notable shift, the Biden administration raised the price it’s willing to pay to refill the country’s emergency oil reserves to as much as $79.99 a barrel, setting an explicit price ceiling for the first time. This adjustment, closer to market prices, along with a change in the pricing formula, allows potential bidders to better hedge positions. Ilia Bouchouev, a former trader and current managing partner at Pentathlon Investments, praised the move, saying, “Good to see more market-based thinking finally.” This change aims to address traders' concerns about the rules governing the sale of oil to the government, which hadn’t kept pace with evolving risk management strategies in a volatile market.

Street Views

• Ilia Bouchouev, Pentathlon Investments (Neutral on the oil market):

  "Good to see more market-based thinking finally."