Vantage Point Advisors Energy Blog April 2022

President Biden Announces Plans to Release Around 1 Million Barrels of Oil Per Day For Several Months From the SPR [1]

U.S. President Joe Biden plans to release up to 180 million barrels from the country’s strategic petroleum reserve (SPR) with the goal to cool soaring crude prices. The plan would be to release around 1 million barrels of oil per day.

For reference, the current authorized storage capacity of the SPR is 714 million barrels. As of January 26, 2022 we were using about 590 million of that capacity. [2] A drawdown of this amount would equate to about 30% of the existing supply.

This additional supply, added to the marketplace, would definitely make a difference, but the resulting drawdown in the SPR reserves could lead the U.S. to a dangerous position, without future efforts to replace that oil. Pulling oil from the SPR does nothing to balance the economic needs of a recovering economy in the long-term; it only gives a short-term solution to an ongoing problem.

Goldman Sachs Analyst Commentary [3]

In a research note Thursday, March 31, Goldman Sachs commodity analysts said the reported release from U.S. reserves would help the oil market toward rebalancing in 2022 but would not resolve its structural deficit.

“This would reduce the amount of necessary price-induced demand destruction, the sole oil rebalancing mechanism currently available in a world devoid of inventory buffers and supply elasticity,” Goldman Sachs said. “This would remain, however, a release of oil inventories, not a persistent source of supply for coming years. Such a release would therefore not resolve the structural supply deficit, years in the making.”

WTI Strip Prices Increase

Spot prices and futures prices for the WTI contract increased by approximately $1.00 per barrel in the near term and approximately $6.00 per barrel over the longer term.

The oil price curve remains in “backwardation” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on April 5, 2022, as well as the predicted crude oil prices based on options and futures markets. Blue lines are within one standard deviation (σ) of the mean, red lines are within two standard deviations.

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $77.50 and $141.50 per barrel in mid-July 2022. Likewise, there is roughly a 95% chance that prices will be between $50.00 and $215.00. By mid-September 2022, the one standard deviation (1σ) price range is $72.50 to $147.00 per barrel, and the two standard deviation (2σ) range is $42.50 to $215.00 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. The heightened volatility caused by recent events have led to extraordinary futures ranges. While the mid-September 2022 settlement price is $96, the 1σ range has a spread of $75, and the 2σ range has spread of $173!

For more information, contact:

Gregory E. Scheig, CPA/ABV, CFA, CMA
Vantage Point Advisors
Managing Director / Energy Practice Leader
Certified Mineral Appraiser
180 State St., Suite 225, Southlake, TX 76092
214.254.4801
gscheig@vpadvisors.com

 

[1] https://www.cnbc.com/2022/03/31/oil-markets-us-strategic-petroleum-reserve.html

[2] https://www.energy.gov/fecm/strategic-petroleum-reserve-9

[3] Ibid