The United States will start buying crude oil for the Strategic Petroleum Reserve within the next two weeks, with plans to buy around 77 million barrels, Bloomberg reported.
The move--which follows President Trump's announcement last week that the government will buy "large amounts" of crude--aims to replenish the SPR by taking advantage of low oil prices while providing some much needed support for the local oil industry. The industry suffered a substantial blow by the latest oil price crash, especially in the shale patch.
According to Trump, the purchases would save "the American taxpayer billions."
According to Bloomberg calculations based on the Friday closing price of West Texas Intermediate, if the government buys 77 million barrels of crude, it will pay $2.4 billion for it.
The Strategic Petroleum Reserve has a capacity to hold 713.5 million barrels of crude. Currently, it holds some 635 million. Three years ago, some legislators suggested it might be time to stop hoarding oil in the SPR given the fast increase in domestic oil production and falling exports. However, the dominant opinion remains that the SPR is necessary and the latest move by Washington has just revealed a secondary purpose to it: providing some relief for troubled shale producers. Whether this relief will be enough, however, remains questionable.
Most shale independents budgeted average prices of WTI much higher than the current $30 a barrel. Now that the Covid-19 pandemic is battering all industries and oil demand forecasts are getting gloomier by the day, the pain is becoming sharper. Many are preparing to begin cutting their spending plans and at least one company-Parsley Energy-has asked oilfield services providers to cut their prices by at least 25 percent.
Meanwhile, fund managers and investment bankers expect oil demand to suffer its greatest annual decline on record, possibly dropping by more than the 2.65 million bpd that was recorded in lost demand in 1980.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
President Trump’s administration is duty bound to bail out the US shale oil industry not only because it is a $7-trillion industry employing more than 2% of the work force and therefore very important for the US economy but also because it enables the United States to have a say in the global oil market along Russia and Saudi Arabia.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London