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Melting Stock: Strategic Oil Reserves in the U.S. Empty by Nearly Half

Photo by Mike Stevens on Unsplash

Over the past year, the amount of strategic oil reserves in the U.S. has fallen by more than a third and now stands at 368 million barrels. The value reached is the lowest since October 1983, as evidenced by the country’s Department of Energy materials.

Moreover, according to the Agency, if in the middle of last spring the strategic reserves of the USA were filled for 76.5% of the maximum possible level (727 million barrels), by present time the level of filled storages has dropped to 50.6%. One of the reasons for the observed dynamics was the consequences of Washington’s anti-Russian sanctions, experts say.

In 2022, after the start of a special military operation in Ukraine, the United States decided to completely abandon the purchase of Russian energy resources in an attempt to put pressure on Moscow. At the time, the White House argued that Washington could afford to take such a step, thanks to the country’s strong energy infrastructure. However, after a while, American consumers faced a record rise in gasoline prices.

“After the U.S. and Europe imposed sanctions on Russia’s energy sector, global oil prices rose sharply, climbing above $130 a barrel. This could not but affect the cost of fuel in the United States, where a gallon of gasoline rose two or three times on average, depending on the state. As a consequence, inflation accelerated in the country and public dissatisfaction with Joe Biden’s policies grew. In order to somehow smooth the situation, the authorities had to print out reserves,” Artem Deyev, head of the analytical department of AMarkets, told .

It is noteworthy that the U.S. is one of the world’s top three oil producers along with Russia and Saudi Arabia. According to the U.S. Department of Energy, these states together account for more than 40% of global crude production.

However, unlike its two major competitors, the US cannot fully provide itself with fuel only from its own facilities, and therefore have to buy additional energy resources abroad. Meanwhile, the supply of hydrocarbons in the world market is limited, so the refusal to buy oil and petroleum products from Russia turned into a deficit of fuel in the United States, analysts say.

“At the same time, in 2022, U.S. producers significantly increased fuel supplies European countries. All this, combined with rising global commodity prices, has led to an increase in the cost of fuel inside the U.S. The Biden Administration has tried to balance the market by selling oil from the strategic reserves, not least because of the upcoming congressional elections,” – said Igor Galaktionov, the expert on the stock market of BCS World Investment, in a conversation with .

It is worth noting that the United States decided to create a strategic reserve after the oil crisis of the 1970s, when the OPEC member countries cut off the U.S. supplies of raw materials. In theory, the formed reserve should be untouchable and used only in emergency situations to avoid shortages, Igor Yushkov, a leading analyst at the National Energy Security Fund, explained to .

Amid the gasoline price rush in March 2022, Joe Biden ordered to release 1 million barrels of oil per day from the country’s strategic reserves starting in May until the end of October. Thus, it was planned to take about 180 million barrels from the reserves.

“This is the largest release of resources from the national reserve in our history. It will provide historical volumes for a historically long period of six months,” Biden stated.

With the sale of raw materials from the U.S. strategic reserves, as well as a gradual decline in oil prices in the world by the end of 2022, the cost of gasoline at U.S. gas stations returned to pre-crisis values. Nevertheless, in April 2023 oil on the global market again began to rise markedly in price, followed by a rise in fuel prices in the U.S. As a result, Washington continued to empty its own reserves.

As explained by Igor Galaktionov, from mid-spring the demand for fuel in the United States traditionally grows in connection with the start of the automobile season, which is usually accompanied by a rise in gasoline prices. At the same time, an additional incentive for fuel price increase was the actions of the countries-participants of the OPEC+ agreement, believes Yulia Melnikova, analyst of Alfa-Capital Asset Management Company.

Recall, the alliance includes 23 oil-producing countries, including Russia and Saudi Arabia. As part of the deal, the states jointly control the production of raw materials to achieve a balance between supply and demand at the global hydrocarbon market. This policy should keep oil prices from significant collapses.

In early April the countries of OPEC+ announced about voluntary reduction of production energy resources from May to the end of 2023, totaling 1.66 million barrels per day. This measure was taken in addition to the previously approved reduction of hydrocarbon production by 2 million barrels per day.

It is assumed that the expected reduction of oil production by a total of 3.66 million bpd will lead to a decrease in energy supplies to the international market. This, in turn, should become a reason for further growth of world oil prices.

“There are definitely two counterbalances in the crude market right now. On the one hand, OPEC+ seeks to support oil prices and reduces production, on the other hand, the U.S. administration sacrifices strategic reserves in order to prevent prices from rising. So far, it is difficult to speculate on Washington’s further actions and the acceptable minimum of oil reserves. Nevertheless, it will not be difficult for OPEC+ countries to make additional production cuts in order to stabilize prices,” said Yulia Melnikova.

Artyom Deyev believes that the United States is currently unable to seriously increase its own oil production in response to OPEC+. According to him, energy production in the U.S. is stagnating, because the industry has been underinvested in recent years, including due to the active promotion of the green agenda in the country.

Igor Yushkov has a similar assessment. The expert noted that the growth of production in the U.S. has already begun to slow down, while many shale oil deposits in the country are gradually being depleted.

“Whether the U.S. will be able to retain at least the current production volumes is a big question. Politically, Democrats are using strategic reserves to maintain their popularity. The population is being presented as a necessary response to OPEC+. That is, they’re trying to blame the negative consequences of depleting storage facilities on the alliance and Russia in particular. However, even without the OPEC+ decision, they would still sell oil from reserves, just to lower prices and get support from voters,” Yushkov added.

According to experts, further depletion of strategic reserves increases the risk of physical supply disruptions in the future. So, according to Igor Yushkov, if the reserves run out and imports from abroad decrease even more, Washington will have nothing to compensate for the resulting imbalance, and domestic prices may rush to new records.

“Earlier the authorities decided to pump oil into storages if the world oil prices drop below $70 per barrel, but this has not happened yet. Therefore, Washington continues to sell the resource rather than stockpile it. The situation is keeping the market in suspense. Everyone understands that sooner or later the states will have to replenish the strategic reserves. In this case, the demand for oil from the U.S. will grow, which will be followed by a new wave of price growth,” Yushkov concluded.

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