Oil Drops on Test Sales from U.S. Strategic Petroleum Reserve

After surging over geopolitical tension between Ukraine and Russia, global oil prices fell back on March 12. Improving weather in the United States suggests that fuel demand could decline over the next few weeks as the need for heating dissipates. Inventories rose by 6.2 million barrels in the first week of March, beating the 2.2 million barrel increase projected by market analysts – indicating there is more supply on hand than expected.

Perhaps more importantly was news that the U.S. planned a “test” sale from its Strategic Petroleum Reserve. The Department of Energy plans on selling 5 million barrels of oil in order to test the capabilities of its emergency stockpile. DOE will sell sour crude from its West Hackberry and Big Hill sites in the first test sale since 1990. DOE says that the surge in oil drilling from shale over the last few years has resulted in significant changes for the reserve system, requiring a test to make sure all its capabilities function appropriately.

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The timing is suspicious considering the standoff with Russia, which has sparked calls for the U.S. to use its SPR as a weapon to undermine Russia. However, DOE went to lengths to say that the test sale has been the topic of discussion for months, and is happening now because annual maintenance cycles at many of the nation’s refineries.

The sale of 5 million barrels is the equivalent of a little more than a quarter of U.S. consumption for one day. Brent prices dropped to $108 on March 12 on news of the announcement. The WTI benchmark dropped by $1.57 in midday trading to $98.46. Troubling economic indicators emerging from China are also raising worries about a slowdown, pushing down oil prices. Fresh data from China will be released on March 13.

By Joao Peixe of Oilprice.com