(Technical Analysis) US to Purchase 6 Million Barrels of Oil for Strategic Reserve Amid Lower Prices
The Biden administration is planning to acquire up to 6 million barrels of oil to replenish the Strategic Petroleum Reserve (SPR), a source familiar with the situation disclosed on Tuesday. This purchase would match the largest since the significant sale of reserves in 2022.
An official announcement is expected as early as Wednesday, with the oil intended for delivery to the Bayou Choctaw site in Louisiana—one of four highly secure SPR locations situated along the coasts of Louisiana and Texas. According to the source, the oil will be purchased from energy companies for delivery in early 2025.
The Department of Energy (DOE) is seizing the opportunity to buy at current crude prices, which are below the administration’s target price of $79.99 per barrel. This figure was set as the benchmark for replenishing reserves following the historic sale of 180 million barrels in 2022. On Tuesday, West Texas Intermediate (WTI) crude traded at around $71.70 per barrel—up slightly after Hurricane Francine disrupted production in the Gulf of Mexico. However, concerns about weakened global demand have kept prices relatively subdued in recent weeks.
The 2022 sale, the largest in US history, was initiated following Russia’s invasion of Ukraine, which caused major disruptions to global oil markets and pushed petrol prices in the US to over $5 per gallon. To date, the Biden administration has repurchased more than 50 million barrels at an average price of around $95 per barrel, according to the DOE.
While oil prices are currently below the target buyback price, geopolitical uncertainties—such as ongoing conflicts in the Middle East—could easily lead to a surge in prices. In April, the US had to cancel an SPR oil purchase due to rising prices.
The SPR currently holds about 380 million barrels, most of which is sour crude—oil that many US refineries are designed to process. The reserve reached its peak of nearly 727 million barrels in 2009.
Impact on Commodities Prices:
The US government’s decision to purchase up to 6 million barrels of oil while prices are relatively low is likely to influence oil markets and broader commodity prices in several ways:
- Short-term Price Stability: This large-scale purchase might help stabilise oil prices in the near term, particularly as prices are currently below the administration’s buyback target. The market may perceive this as a signal of future demand, keeping oil prices in the $70-$80 range.
- Potential Price Increases: Geopolitical risks, such as conflicts in the Middle East or natural disasters, could disrupt supply chains, pushing oil prices higher. As the US intends to take deliveries by 2025, any supply-side shocks in the meantime could cause prices to spike.
- Broader Commodity Ripple Effect: Increases in oil prices often lead to higher transportation and production costs across the economy, affecting the prices of other commodities like metals and agricultural goods. Investors should be aware of how rising energy costs might drive up these prices.
- Market Reactions to Global Events: Any significant developments, whether natural disasters or geopolitical crises, could lead to increased volatility, resulting in higher oil prices and subsequent commodity price hikes.