The U.S. Strategic Petroleum Reserve has fallen to its lowest level since 1982, according to government figures, after a massive release ordered by President Trump. Crude stocks stood at 283.8 million barrels for the week ending September 18, down from 285.0 million the week before and 406.0 million a year earlier.
This year has seen a second multi-decade low, and it arrived in early August when the reserve dropped below 300 million barrels and beneath its 1983 level.
The Trump Release That Triggered the Drawdown
This drawdown began with a 172 million-barrel release that President Trump ordered in March. It came as part of a coordinated 400 million-barrel discharge from 32 International Energy Agency member countries.
About a week after the start, discharge began and was projected to last for roughly 120 days. Officials promised to restore roughly 200 million barrels within a year without charging taxpayers.
Twice this year, the reserve has reached a new low not seen in decades, first dropping below its 1983 level in early August and then falling below 300 million barrels.
Two Floors Govern How Low the Reserve Can Fall
The federal requirement calls for at least 252.4 million barrels on hand. A commonly cited threshold for efficient pumping and processing sits between 250 and 300 million barrels. The current reserve is approaching that lower limit.
According to the Energy Information Administration, the reserve was at 284.6 million barrels for the week ending September 18. The Department of Energy’s figures then show a drop the next week, reaching 283.8 million barrels, the lowest level since October 1982.
What Analysts Are Saying About the Drawdown
Energy analyst Ben Cahill of the Atlantic Council has issued a caution about the diminishing effectiveness of oil releases. His warning is “At a certain point it becomes a self-defeating move, because releasing more oil into the market is overwhelmed by the perception that we’re running out of options.”.
What MST Marquee’s Saul Kavonic described as “living on an oil market credit card” earlier this month matches the pattern of the decline. Hormuz flows are still running at roughly a third of their pre-war levels. Throughout much of the crisis, it has been stock draws rather than fresh supply that have kept Brent under $110.
How the Swaps Work
Some 133 million barrels of the reduction come from swaps with Shell, Vitol and Trafigura, which are bound by contract to give back 1.25 barrel for each one they took, with deliveries set to start early next year.
Some of the oil will return eventually, thanks to the swap arrangement, but not until early next year.
The Swap Terms at a Glance
- 133 million barrels drawn down via swaps with Shell, Vitol and Trafigura
- Contract terms call for returning 1.25 barrels for every one taken
- Deliveries scheduled to begin early next year
What Happens Next
The reserve sits at the low end of its usual working range right now. Its fate rests on whether the administration follows through with the promised rate of restocking.
Some barrels will come back through the swap deals with Shell, Vitol and Trafigura, though those arrangements do not take effect until early next year. By that point, the reserve might already have fallen below its operational minimum.
Now the issue is whether the reserve will be tested against a floor of 252.4 million barrels, or if the administration moves ahead before the number comes anywhere near that point.
A question of timing arises from this scenario. Should the reserve dip too far, and the public begins to doubt that oil is still available, the price effect the administration hopes for could turn against it.
“At a certain point it becomes a self-defeating move, because releasing more oil into the market is overwhelmed by the perception that we’re running out of options.”
Ben Cahill’s warning gets at the danger: once people believe supplies are running short, letting out more oil no longer helps.
This year, the reserve has already reached its lowest point in more than two decades on two separate occasions. Now the question is whether it goes below the legal limit of 252.4 million barrels, or whether the administration moves to prevent that from happening before the reserve comes anywhere near that mark.
The question of whether the administration can move fast enough to refill the reserve still hangs in the air. Swap arrangements will bring some barrels back, though not before early next year. By that point, the reserve could already have fallen below its operational minimum.
How markets price oil over the next few months will depend on the answer.
Source material: “U.S. Strategic Petroleum Reserve Falls to Lowest Level Since 1982,” oilprice.com.
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