Release the barrels !

The US finally announced the release of 50 mb of crude oil into the market, coordinated with Japan, South Korea, the UK and China. ICE Brent crude rallied strongly, and snapped back to 82 $/b at the front, while font time spreads rallied to 100 cents. In total, the volumes released globally amounts to 65 mb, which represents about 83% of a regular day of global crude intake by refiners (about 78 mb/d). Interestingly, much of the volumes released will be on a swap basis, meaning that they must be returned to the strategic reserve. While the return date for US barrels is within 2022/2023, other countries such as South Korea or China may need the barrels earlier than 2023 given the state of their strategic reserves. For the US announcement, about 18 mb will be tendered outside of a swap agreement, effectively front-loading the pre-authorized SPR sales that are scheduled until 2031. The Japanese SPR release will be more modest, at 4.8 mb.

In the meantime, the API survey showed a build in US crude commercial stocks of 2 mb, while gasoline stocks built by 0.6 mb and diesel stocks declined by 1.5 mb, which is in line with seasonal expectations. It will be interesting to see how these strategic reserves tender, as we previously thought that prompt markets were not tense given how physical differentials trade across the globe. Still, Biden’s response has already partially worked, as the backwardation remained at 60 cents for WTI, away from the 100 cents experienced on the ICE Brent crude curve. WTI-Brent spreads are now expanding further, at 3.7 $/b, indicating that domestic demand for SPR barrels may not be sufficient to clear these barrels and should be sold at discounted values to international buyers, i.e. India and China.