Oil Slips as Investors Assess Potential Benefit of SPR Release

(Bloomberg) -- Oil closed lower after swinging between gains and losses driven by factors including a potential release of crude from U.S. reserves and fuel-switching concerns.

Futures ended Tuesday’s choppy session down 0.2% in New York. After signals from the Biden administration that it has been considering a release from its emergency crude reserves, the Energy Information Administration said the impact on oil prices would only be temporary, echoing several analysts. Meanwhile, supply concerns rose after delays on a Russian pipeline sent natural gas prices soaring and once again raised the specter of power plants switching to oil. 

“Crude prices remain very choppy as energy traders await a decision from the Biden administration over an SPR release,” said Ed Moya, senior market analyst at Oanda Corp. “It seems the energy market is convinced that even if the U.S. resorts to tapping the strategic petroleum reserve, the benefits would be minimal.”

The industry-funded American Petroleum Institute reported on Tuesday that U.S. crude supplies rose 655,000 barrels last week, according to people familiar with the data. The report also showed stockpiles in Cushing, Oklahoma, the biggest storage hub in the U.S., declined by about 491,000 barrels. The U.S. government will release its weekly inventory tally on Wednesday

Oil hit a seven-year high above $85 last month with OPEC and its allies only gradually restoring supplies halted last year. Yet, the International Energy Agency said Tuesday that market tightness is starting to ease as production recovers in the U.S. and elsewhere. 

With energy prices still at high levels, U.S. President Joe Biden has been under pressure to tap the country’s emergency crude reserves. While the U.S. has joined countries including India and Japan over concerns of supply tightness in the market, debate remains on how best to counter the situation. 

“We’re still on the cusp of winter, which is the peak demand season and there’s still a bullish undertone to the market,” said John Kilduff, founding partner at Again Capital LLC. “It’s a tight set-up and still vulnerable to some upside if they don’t come through with the SPR release.”

India’s Oil Minister Hardeep Singh Puri said that strategic oil reserves were intended for “force majeure situations” such as natural disasters versus short-term solutions for price increases. In testimony before the U.S. Senate Energy and Natural Resources Committee, EIA acting administrator Stephen Nalley said an SPR release would lower prices but only for a short time. 

“Our analysis shows that it’s generally short-lived -- a couple of months -- and that typically the other dynamics in the market would overtake any decrease in price,” he said. 

Meanwhile, the Federal Reserve Bank of St. Louis President James Bullard said earlier that he thinks the Federal Reserve should go in a more hawkish direction to manage inflation. The pullback of support for the economy would lead to a stronger dollar, which would likely weigh on commodities.

In the U.S., the industry-funded American Petroleum Institute will release data on U.S. stockpile levels later Tuesday. Analysts surveyed by Bloomberg estimate an inventory increase of 1.2 million barrels last week. 

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