The surprise announcement of OPEC cuts this weekend has caught market participants and the Biden administration off-guard. OPEC's "voluntary" cuts to crude oil production have pushed up crude oil prices across the futures curve. From our vantage point, these OPEC cuts are a potentially welcome development that fulfill the same substantive policy that Strategic Petroleum Reserve (SPR) repurchases should be fulfilling. They reduce downside price volatility, thereby stabilizing and supporting sufficient investment against deeper tail risks to global supplies. However, it is deeply troubling that these policy objectives, that President Biden directly embraced, are not being carried out by the Department of Energy (DOE).
While we don't think Secretary Granholm's dismissal of SPR repurchases caused these OPEC cuts, we hope the DOE learns from what is a clear failure of preparation to execute President Biden’s policies. With oil prices in the president's "SPR repurchase zone" for two weeks, the DOE should be embarrassed that there was no serious intent or preparedness to give credible service to the president's commitment. The DOE should not be offering weak excuses about logistics or the procedural difficulty of fixed-price forward contracts; there is ample room to manage the hurdles associated with acquiring crude in a manner contingent on market developments. Crude oil can be delivered to the SPR well after the point that a repurchase contract is first initiated. The DOE can still course-correct on this front of SPR policy, and it should do so expeditiously.
It’s been reported that the DOE's unwillingness to purchase crude oil in the two-week window when spot oil prices were in President Biden's preferred repurchase zone served as an additional motivation for OPEC's actions.
“People familiar with Saudi Arabia’s thinking say Riyadh was irritated last week that the Biden administration publicly ruled out new crude purchases to replenish a strategic stockpile that had been drained last year as the White House battled to tame inflation.” - Financial Times April 2, 2023
Substantively, this seems like too far a stretch. Even without DOE’s dithering, the speed and scale of the OPEC cuts are considerably greater than what the SPR could reasonably deliver through repurchases (and therefore, unlikely to be the primary motivation here). Deferred maintenance and the completion of this year’s Congressionally mandated sales do hinder DOE’s ability to physically acquire crude oil in the next four to six months.
However, whether or not the reporting accurately reflects OPEC motivations, even the mere perception serves to undermine the credibility of President Biden’s commitments. After the president issued a clear directive to repurchase crude oil if the West Texas Intermediate price sharply or durably fell through $72, the DOE has done little to show it is capable of following through. Industry, market, and global energy participants are now less likely to take the president's market-stabilizing repurchasing policies seriously as a result of this episode.
There is still time to course-correct. The DOE should not use this episode as a reason to further shirk its responsibilities to carry out the president’s commitment. Institutional risk aversion may be tempting, but only serves to further undermine the policymaking credibility of the United States, that too at a moment of elevated geopolitical risk.
The DOE needs to transparently show it is ready to learn by doing in this space. Logistics are not an excuse–the new acquisition regulation was changed specifically to allow fixed-price purchases for later delivery. Among commodities, crude oil arguably has the deepest and most liquid futures curve, and thus makes the prospect of longer term fixed-price forward contracts procedurally straightforward for crude oil market actors. The DOE should be piloting a variety of methods for refilling the SPR through fixed-price forward contract so that they are operationally ready to give credible service to the White House's commitment.
