The Strategic Petroleum Reserve ‘would be harder to use,’ and the only buffer for oil markets is Middle East production, energy expert says

Marwan Naamani/AFP via Getty Images

  • The SPR “would be harder to use” to balance a spike in oil prices, energy expert Dan Yergin said.

  • The S&P Global vice chairman said that oil prices can spike if the Israel-Hamas war escalates.

  • The only spare capacity right now is in the Middle East, in countries like Saudi Arabia.

The biggest tool the US uses to fight wild swings in oil prices may not be in play again as crude markets face the prospect of more geopolitical instability.

S&P Global Vice Chairman Dan Yergin, an energy expert and historian, told CNBC on Monday that the Strategic Petroleum Reserve is almost at the point where it’s past the comfort level.

“We’ve used about half of it, so it would be harder to use it,” he said. “And we’re kind of getting to a level where you don’t want to use it.”

The SPR, the world’s largest reserve of emergency crude oil, is usually used to stabilize disruptions in oil supply. Last year, the US government siphoned 180 million barrels from the SPR in the aftermath of the Russia-Ukraine war.

The reserve currently sits at 40-year lows at 351 million barrels, according to the Energy Department. That’s less than half of the all-time highs from 2010 and about 40% below where it was when the withdrawals began.

Despite the big drawdown last year, a spokesperson for the Energy Department told Insider last month that the SPR “stands ready to deliver on its mission to respond to future supply disruptions, providing relief when needed most.”

Weekly US stock of crude oil in SPRWeekly US stock of crude oil in SPR

Weekly US stock of crude oil in SPRUS Energy Information Administration

Yergin estimated that under the best case scenario next year, oil prices might trade in the mid-$80-per-barrel range. But an expanded conflict would produce spikes, he warned.

Western Texas Intermediate crude oil is trading at $87 a barrel, up from $82 right before the conflict began.

“The only buffer is really in the Middle East right now,” Yergin added, referring to the region where there is spare production capacity.

Saudi Arabia, along with Russia, has been cutting crude oil production in an effort to eliminate price “distortions” in the market. The countries are said to have made close to $3 billion the past quarter from slashing production.

Still, Yergin noted that production growth outside the OPEC+ alliance has pressured oil prices lower, more so than prospects for lower demand in China.

In fact, US oil production surged to a record high of 13.2 million barrels a day earlier this month. The prior record was 13.1 million barrels a day hit in February 2020, right before the COVID-19 pandemic slowed down the economy.

Read the original article on Business Insider

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