Tuesday, June 28, 2011

Impact of the Release of the US Strategic Petroleum Reserve

In an unprecedented move, the IEA announced on June 23 the release of 60 millions barrels of petroleum products including 30 million barrels of crude oil from the US Strategic Petroleum Reserve (SPR) supposedly to compensate for the loss of the Libyan production. The basic idea is to "shock" the oil market and further lower prices by adding 2 million barrels per day over a period of 30 days. The last time such action was taken was after hurricane Katrina in 2005 and during the first Iraq conflict in 1990-91. Already, prices have dropped by about $3 since June 22, more below the fold.

Figure 1. US Strategic Petroleum Reserve. Data from the EIA.
Looking at the various periods of draw-downs since 1983, we can see that 30 million barrels over 30 days is a fairly significant use of the SPR. The one that come close in terms of amplitude is in 2002 with a decrease of 30 million barrels over 12 weeks. In terms of impact on prices, the 2002 drawdown saw a 20% decrease in weekly prices (WTI).

Figure 2. SPR drawdown and effect on weekly crude oil prices (WTI). The horizontal axis is the number of weeks. The black dotted line represent the planned release. Data from the EIA.
Below is an attempt to derive the Impulse Response Function (IRF) resulting from a negative shock to the SPR. IRF functions are used in econometrics in order to assess the impact of an endogenous variable variation on the other ones (see also this post for a good explanation). From this analysis, we can see that WTI prices start to decrease significantly after 4 weeks to reach -30% at a 7 weeks horizon but then seems to recover afterward.

Figure 3. Estimated Price variation to a -1 sigma shock to the SPR. The horizontal axis is the number of weeks. The red curves define the 90% confidence interval, the blue curve is the median estimate.
The same effect can be observed on Brent prices:

Figure 4. Same as Fig. 3 but for Brent.

Of course, other important factors will influence prices such as gasoline consumption, industrial activity, economic growth and the ongoing sovereign debt crisis in the Eurozone. The other unknown is the reaction of OPEC producers in case prices go down too fast.