US wields crude stockpile as weapon in global oil price battle

The US government has signalled a “new era” of activist intervention in international oil markets, experts said, with the White House increasingly willing to use its strategic stockpiles of crude to manage global prices.

President Joe Biden this week authorised the final instalment of a record 180mn barrel drawdown from the US Strategic Petroleum Reserve and told his officials to prepare for further releases as the White House looks to keep a lid on prices ahead of midterm elections next month.

Market participants said further drawdowns were likely this winter to counter a rise in prices driven by a clampdown on Russian exports.

“I think we are in a new era of much more nimble and deft use of the SPR as both a market and a geopolitical tool,” said David Goldwyn, a former senior energy official in the administration of Barack Obama.

Washington’s willingness to intervene so directly in oil markets means that price risks once primarily associated with volatile producer governments or the Opec+ cartel now also emanate from the Oval Office.

Biden has relied on the SPR more than any of his predecessors since the facility was created in the wake of the 1973 oil shock as a tool to manage major market disruptions.

Deploying the reserves — held in huge salt caverns along the US Gulf Coast — has allowed the president to smooth some of the market turmoil caused by Russia’s invasion of Ukraine. His announcement of a record drawdown in March was a pre-emptive move amid predictions that sanctions on Russia could remove as much as 3mn barrels of the country’s oil from the market.

But he has come under fire from Republicans, who have accused him of recklessness in reducing volumes to their lowest levels since the early 1980s — hampering the country’s ability to react to future oil shocks.

“Draining oil from the strategic reserve is a short-sighted and dangerous choice that imperils our energy security at a critical time of global uncertainty,” Jerry Moran, the senior US senator from Kansas, wrote in a letter to the president this week.

Biden’s initial drawdown from the reserves last November was blasted for being a brazenly political move aimed at bringing down petrol prices to placate voters at a time of no significant disruption. Many drew comparisons to President Bill Clinton’s use of the SPR to douse prices at the pump ahead of the 2000 presidential election between his vice-president Al Gore and the Republican challenger George W Bush.

Also significant, said analysts, was Wednesday’s White House pledge to start buying back oil to replenish the reserve at a price of $67-$72 a barrel — another form of intervention designed to affect oil prices many months in the future. The move, Biden said, would “help create certainty around future demand for crude oil”. 

I think we are in a new era of much more nimble and deft use of the SPR as both a market and a geopolitical tool

“That will encourage firms to invest in production right now, helping to improve US energy security and bring down energy prices that have been driven up by Putin’s war in Ukraine,” the president said.

His direction to officials to prepare for more drawdowns comes after Saudi Arabia and other Opec+ producers last month announced plans to slash output, enraging the White House.

Bob McNally, head of consultancy Rapidan Energy and a former adviser to the George W Bush administration, noted that, ironically, the motivation behind the White House’s repurchase price — an effort to put a floor in the market to give producers more confidence to invest — was akin to the cartel’s supply cut.

“The Biden administration and Opec+ are both basically saying: ‘Hey investors — drill. Drill, baby drill. We’re not going to let prices collapse’,” he said.

Goldwyn said the administration was “trying to change the calculus so that we can maximise US supply and maybe put a little bit the fear of God into Opec+ about a return of the market share battles of a few years ago”.

Having shown its willingness to use the stockpile to influence oil prices, the White House is likely to draw down more barrels later this year if a looming European embargo on Russian exports — and potential retaliatory moves by the Kremlin — trigger market shortages. Analysts said restrictions of petroleum product exports, such as petrol and diesel, also remained on the table.

In the meantime, recent drawdowns are also starting to alarm some market analysts. Robert Yawger, a director at Mizuho Securities, said the record 180mn barrel release “runs out at a really bad time” as Europe’s embargo, set to come into force in December, threatens to cut supply.

If a US plan to keep Russian barrels flowing through the embargo — by capping the price at which importers buy its oil — fails, deep supply shortages could ensue, analysts say.

“I do believe that they’ll go with 90mn more barrels in January through March,” he said. “I think their hand will be forced.”

And even as it begins refilling the stockpile in future, the federal government will be selling more barrels again anyway, under Congressional plans to shrink the reserve during the next two fiscal years. But market forces could leave the administration with little choice.

“Between Western price-cap guns and Russian energy weapons, Biden will probably need those barrels,” said Kevin Book, an analyst at ClearView Energy Partners in Washington.