The Impact of the US SPR Releases
Sept. 30, 2022
The length in the US balance over the last four months and the upcoming two months is primarily driven by the 1.0 mil b/d inventory draws from the US SPR, and secondarily by 0.6 mil b/d of US crude output gains. Initially, SPR draws were overweighted to Mars (medium/sour), a highly demanded crude in the US refining system. Beginning in August, the draws are more biased towards light/sweet crude. With the US refining system likely at max intake of light/sweet, the impact is a widening WTI/Brent spread and significant arbitrage opportunities for Asian discharge of the barrel, which may increase in the short-term as European refiners source heavier crudes from the Middle East to offset lost Urals supply and meet winter fuel demand.
Combined with strong imports by the US from the Caribbean region and gradual production increases, we are likely to see exports sustain a 3.5-4.0 million b/d average for Q3/Q4 2022 periods. This development is expected to support, in combination with growing Middle East export volumes, VLCC demand equivalent growth of close to 40 VLCCs between July and November 2022 (Figure 1), with the Middle East exports balanced between a returning Chinese demand story and support for European refinery demand. We anticipate only modest VLCC supply-side increases through the end of the year, allowing a true opportunity for VLCC owners to capitalize on market conditions in the short-term.
However, our projections point to a sizeable correction in US crude exports during Q1 2023. This sharp reversal leads to a decline in VLCC demand ex-USG beginning in December and for most of Q1 2023, assuming that the SPR program is not extended further. Increasing US crude oil production and imports (heavy/sour) by PADD 3 refiners will help mitigate some of the downturn, as less margin-friendly domestic crudes continue to be exported.
A historical analysis of US SPR levels reveals that the decline in non-Canadian crude imports by US refiners from over 6.0 million b/d when the SPR was established to about 2.5 million b/d at present. This mitigates the forward cover risk from the drain on strategic reserves. In fact, the forward coverage ratio today is still higher than average historical levels, despite the draws when assessed against foreign crude import requirements. Using this metric, the data suggests that there is room for the SPR releases to continue beyond their designated end time in November although we are reluctant to assume this as a base case in our demand projections. However, we would not be the least bit surprised to see such a development, resulting in a stronger export and subsequent tanker demand environment ex USG in Q1 2023 than originally projected.
Figure 1 – VLCC Demand Equivalent Changes (Left) & US Crude Exports with Forecast (Right)
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