AEGIS View: Storing additional crude in the SPRs cannot fix the current mismatch between supply & demand. This market is over-supplied and will remain as such until either producers start shutting-in or demand recovers from the impact of COVID-19.
President Trump still plans to fill the country’s strategic petroleum reserves (SPR), he reiterated in a press conference on Monday (April 20). The plan was first announced on March 13 by President Trump; however, the plan was met with heavy resistance in the senate as some Democrat leaders referred to the plan as a “bailout for the energy industry.” The bill put in front of congress had allocated three billion of the $2-trillion stimulus package be provided to the Department of Energy (DOE) to buy crude to fill the SPRs. However, this portion of the bill was ultimately removed. The Trump administration seems willing to give it another try.
If Congress fails to approve a bill allowing the DOE to purchase crude to fill the reserves, there are still other ways of making the storage available for producers. One possibility includes using the SPR sites as regular storage, allowing industry to store their barrels. The government could be paid a fee or receive a small percentage of the oil in exchange for storage.
Around 78 MMBbls of open storage space remains in the SPR. Its maximum storage capacity (located along the US Gulf Coast; see the map to the left) is around 713.5 MMBbls, with 635 MMBbls of storage space currently occupied.
Access to the SPR would provide a meaningful increase to total storage available in the market. According to Reuters, there is still 280 MMBbls of unused commercial storage capacity, however if we continue to fill up at the current pace of around 16 MMbbls/week, we could reach a historical storage squeeze by the end of May. The 280 MMbbls of remaining commercial capacity can be misleading, as commercial tankers/ storage facilities cannot be filled to the top as some storage must remain available for receiving new deliveries, tank-to-tank transfers, blending, and other routine operations. As of last Friday, the United States was 175 MMBbls away from reaching peak storage levels last seen in May 2015.
“The price action will cause producers to cut (production) harder, period. Everything else is background noise.”Reuters source, 4/23/2020
Source article (opens in new tab): Drowning in crude, U.S. drillers say Trump strategic reserve plan is no lifeline
But the SPR’s 78 MMBbls of capacity is not immediately available, because its daily injection capacity is around 430 MBbl/d, according to the Journal of Petroleum Technology. This is lower than what the DOE reported in 2016, that daily capacity at most of the sites is around 225 MBbl/d.
Additionally, the SPRs are limited in which types of crude can be stored. Most of the crude types stored in the SPR today have API gravities less than 37. Much of the tight oil produced in Texas and North Dakota has API gravities ranging between 40 and 50. The US DOE currently only allows two grades of crude to be mixed into each location after finding that mixing too many different grades created problems for downstream marketing efforts. In 2019 (Bloomberg), there were reports of tainted crude being sold from the SPRs to refiners in the Gulf Coast. The crude had an abnormal amount of H2S which is a major hindrance in refining/ transportation processes as it can erode key infrastructure, while also posing a major health risk to anyone exposed. The DOE ended up paying quality adjustment payments to compensate for the degraded product retrieved, but this could be a key concern for those considering utilizing the SPRs as storage.
Implications/ Market Impact
The SPRs may provide short-term support but will have a limited impact on the current supply/ demand imbalance. With congress dragging their feet on approving funding for the DOE to fill the reserves, we have begun to see signs that the US will use the sites as commercial storage rather than taking ownership of the excess oil. With crude stocks filling at a rate of 2 MMbbl/d, the 430 MBbl/d of additional capacity available will help in the short term. The industry will still need to see either substantial production cuts or a strong rebound in demand – which is largely dependent on the outcome of COVID-19 & social distancing measures. Utilizing the SPRs would give the U.S. around 25% of additional remaining storage capacity – in addition to the commercial storage available.