New Defense Bill Blocks SPR Oil Sales To China

The United States' Senate has passed an amendment to the annual defense bill that will prohibit China from purchasing oil from the United States' emergency stockpiles.

Voting overwhelmingly in favor of the bill, 85 to 14, the amendment will now be added to the National Defense Authorization Act (NDAA), which is poised to be passed later this year. 

Co-sponsored by Democratic Senator Joe Manchin and his Republican counterpart Ted Cruz, the amendment aims to restrict sales of U.S. oil from the Strategic Petroleum Reserve (SPR) to companies under the control of the Chinese Communist Party. The bill also bans the export of crude oil from the SPR to China. 

Its passage signifies a significant shift in the country's energy policy and could have significant implications for global oil markets. For starters, it would make it harder for other countries to fully cooperate with the U.S. in coordinating their SPR releases whenever oil prices spike. 

In 2021, the Biden administration  reached out to several countries including China, India, South Korea and Japan, urging them to synchronize the release of crude from their Strategic Petroleum Reserves (SPRs) in a bid to lower global energy prices.

The SPR is currently at a 40-year low of 346.8 million barrels after the Biden administration sold 180 million barrels from the reserve in a bid to lower oil prices. It's unlikely that the Biden administration will start refiling it with oil prices above the level the Administration said it would trigger purchasing action. Further, any buyback programs would have to be carefully coordinated to prevent price hikes.

That said, the government would have little trouble finding enough oil to refill the SPR with U.S. production now at record levels. The Energy Information Administration (EIA) has forecast total U.S. output will hit 12.61M bbl/day in the current year, eclipsing the previous record of 12.32M bbl/day set in 2019's and easily beating last year's 11.89M bbl/day.  U.S. crude oil output is up 9% Y/Y, blunting OPEC's efforts to keep supplies low in a bid to goose prices.

There is little doubt the U.S. Shale Patch is largely responsible for keeping oil markets well supplied and oil prices low: Rystad Energy  has estimated that whereas OPEC and its allies have announced cuts amounting to ~6% of 2022's production, non-OPEC supply has made up for two-thirds of those cuts, with the U.S. accounting for half of that.

By Alex Kimani for Oilprice.com

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