Update: Impacts of SPR Releases, Russia-Ukraine War on U.S., Global Oil Markets

Dean Foreman
Posted May 4, 2022

Since President Biden’s March 31 announcement that the U.S. government would release 180 million barrels of oil from the Strategic Petroleum Reserve (SPR) over six months – the largest SPR release ever and intended to address prices at the fuel pump –  allies have pledged to release another 60 million barrels onto global markets. Together, this means as much as 1.3 million barrels per day of supply from strategic reserves could be available.

Given the unprecedented nature of the release as well as current uncertainties about global oil market fundamentals, let’s delve into this month’s top questions, prompting these key takeaways: 

• The Biden administration’s large SPR release announcement appears to have corresponded with about a $2-per-barrel decrease in crude oil prices, according to the U.S. Energy Information Administration (EIA).
• Analyses and projections differ widely as to the impacts of Russia’s war on Ukraine on global crude oil markets.
• Similarly, projections differ for prospective supply sources and oil demand for the rest of the year.

How have global oil supply and demand recently changed?

In its latest Short-Term Energy Outlook, EIA increased the estimated amount that global oil consumption exceeded production coming into this year to 3.9 million barrels per day (mb/d), or 3.8% of global consumption, as of December 2021.  This was up from an estimated 3.2 mb/d in December by EIA’s March outlook, and neither estimate could have completely factored in the evolving impact of Russia’s war on Ukraine. However, both estimates highlight that global oil markets were in a historically large imbalance before Russia invaded Ukraine, with demand far outpacing supply.

What has been the impact on oil production of Russia’s war on Ukraine?

Estimated losses of Russian oil production differ sharply between the two official energy agencies.  EIA has estimated a sudden loss of 0.7 mb/d in April that rises to 0.9 mb/d by May and then gradually expands to 1.6 mb/d by the end of 2023. By contrast, the International Energy Agency (IEA) has estimated a sudden loss of 1.5 mb/d from Russia in April, expanding to 3.0 mb/d in May.

Notably, both agencies project that global oil demand could continue to grow in 2022, despite the loss of supply and increased prices.  Since any deficit between supply and demand must be met by drawing upon crude oil inventories, the two agency forecasts suggest strong but varying degrees of needed measures to use inventories.

Where does the overall outcome leave the world in terms of net changes in supply and demand?

By EIA’s assessment, the world remains on course for oil demand of 100 mb/d this quarter and record levels exceeding 102 mb/d over the latter half of 2023.  If the economy remains on track, global demand could grow by 2.4 mb/d in 2022 and another 1.9 mb/d in 2023 as EIA expects. 

However, EIA’s updated supply assumptions are both interesting and not without controversy.  Even though they expect less supply impact from lost Russian oil than IEA, their recent shift to show Russian output contracting instead of growing this year, as in their previous outlook, magnified the importance of EIA’s assumptions about supply growth from other sources, notably OPEC and the United States, as well as reassessing demand.

How did EIA’s OPEC and U.S. supply projections change post-Russia/Ukraine?

For OPEC, EIA has continued to assume 2.6 mb/d of new supplies could be put on market to unwind the cartel’s 2020 output cuts. By contrast, IEA notes that OPEC only added 40,000 barrels per day in March, or about 1.5% of the annual assumption, so obviously this assumption has not tracked with reality through the first four months of 2022. 

For the United States, EIA increased its assumption of 2022 liquids supply growth to 1.5 mb/d from 1.4 mb/d in the agency’s prior outlook.  Through the first quarter of 2022, however, U.S. crude oil production actually dropped from December. 

And U.S. drilling activity has continued to lag its levels from 2019, which preceded the highest U.S. production that came later in 2019 and early 2020. With multiple headwinds to increased U.S. production – offsetting natural well declines, reduced well productivity so far this year, and fewer well completions coming from previously drilled but uncompleted wells – this means we are likely to need drilling activity closer to its 2019 levels to result in the production required to meet demand that’s already returned to near 2019 levels.

The third element to EIA’s global oil market balance is the demand assumption that we noted is still projected to increase to record levels next year. Importantly, EIA reduced its global demand estimate for 2022 by 1.1 mb/d since last month’s outlook. With a historical demand elasticity, this would normally take a drop in GDP growth by 2.0% to 2.5% to reduce global oil demand by this amount.  However, the Bloomberg economic consensus and IMF so far have only reduced their GDP growth assumptions by about one-fourth as much. If EIA’s assumption of decreased global oil demand doesn’t prove accurate, the difference in supply to meet that demand would need to come from existing oil inventories.

What’s happening with crude oil inventories, and what role are strategic petroleum reserves playing?

There are two types of inventories – commercial and government-held strategic petroleum reserves – that could be considered at either the U.S. or global levels. However, the international data are limited outside of economies of the Organization for Economic Co-operation and Development.

Internationally, IEA’s latest reports showed that global oil inventories decreased for 14 consecutive months, with February 2022 stocks 714 million barrels below those at the end of 2020.  This implies global inventories of 1.9 billion barrels – and their lowest point on record since 1990, based on historical data from Bloomberg.

U.S commercial crude oil inventories (excluding the SPR) were 419.5 million barrels as of April 22, their lowest for the week since 2014. U.S. Strategic Petroleum Reserves were 553.1 million barrels, also as of April 22, their lowest since January 2002.

To be clear, these figures clearly show that global inventories and U.S. inventories have already been at historically low levels, and forward commitments to release even more oil is a major uncertainty amid global demand in excess of 100 mb/d and projected by EIA to grow to record levels.

How much has been released from U.S. strategic petroleum reserves so far, and how much could be released?

More than 68 million barrels, or 11% of crude oil holdings, were released between September 2021 and April 22, 2022, per EIA.  If the Biden administration follows through with releasing 180 million barrels from the level at the end of March, SPR stocks could fall to their lowest levels since 1983.

Has the coordinated SPR release driven lower prices, as the administration promised?

Since the Biden administration’s March 31 announcement on the SPR release, Brent crude oil prices fell by $2.31 per barrel (2.2%) as of April 26 per Bloomberg. Although the timing between crude oil and gasoline prices could differ, retail average U.S. gasoline prices fell by 1.9% over the same period, per AAA.

Has petroleum demand held up with recent high prices?

Yes, resoundingly so far to date in 2022.  U.S. petroleum demand in March 2022 was 20.4 million barrels per day mb/d) by API estimates – within 0.9% of demand in March 2019.  With the exception of jet fuel, which was down by 12.1% in March 2022 vs. March 2019, most motor fuels were down by low single-digit percentages compared over the period due to the aftereffects of the COVID pandemic. 

The demand for intermediate products in refining and petrochemicals that enable packing, films, medical plastics and many other consumer goods, however, has remained up by more than 20% over the period, and since it’s the second-largest category by volume (5.9 mb/d), it has almost single-handedly driven demand increases.