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The US Strategic Petroleum Reserve (SPR) has hit a new record low, dipping below 300 million barrels for the first time since 1983.
Data from the US Energy Department shows that for the week ending August 7, the SPR declined by approximately 6.1 million barrels to 298.3 million barrels. This not only breaches the 300 million barrel threshold but also marks the lowest level since 1983, edging closer to the all-time low of around 270 million barrels set in April 1982.
Following the release of this SPR data, international oil prices accelerated their gains. Late in the US morning session, West Texas Intermediate (WTI) crude futures briefly topped $81.30 per barrel, while Brent crude surged past $86.90, both recording intraday gains exceeding 4%. This rally comes after a sharp decline of more than 10% over the previous two weeks, when markets had priced in expectations of the Strait of Hormuz reopening and easing supply risks. However, the latest developments have introduced renewed uncertainty.
Strategic reserves hit lowest levels since 1983
The drop to 298.3 million barrels marks a critical milestone in the ongoing decline of US strategic oil reserves.
Data released by the US Energy Department last month already showed that mid and late July SPR levels were at their lowest since 1983. S&P Global had similarly reported that US SPR inventories had fallen to their lowest since that year.
With inventories continuing to fall, the US strategic reserve has now broken below the 300 million barrel mark, setting a new record low.
The historical low for US SPR was 270.5 million barrels, set in April 1982. In the early 1980s, the US government was in the midst of a large-scale build-up of its strategic petroleum reserves, which subsequently remained well above current levels for many years.
The current decline is tied to the US government's sustained releases of SPR oil in recent years. The US released a significant portion of its strategic reserves in 2022 following the Russia-Ukraine conflict, which triggered energy supply concerns. Since then, inventories have lingered near historical lows. While the government has begun replenishing the stockpile in recent years, the pace of recovery has not been fast enough to reverse the substantial drawdown.
Therefore, the significance of the current inventory level is not just about a few million barrels less; it reflects a shrinking policy buffer that the US strategic reserve can provide against future supply shocks.
Hormuz reopening expectations waver, oil prices reprice supply risk
A key backdrop to Monday's oil price rally is the wavering market expectation that the Strait of Hormuz will return to normal operation.
Reports indicate that Iran has stated an agreement with Oman on a new shipping route through the Strait of Hormuz is in its final stages. However, Iran has also attached other conditions, leaving uncertainty over when normal commercial shipping through the strait will resume. Analysts say that until traders see "verifiable evidence," such as tankers actually transiting or a formal agreement, they will not fully remove the geopolitical risk premium that has been priced into oil.
Some reports note that Iran's conditions for reopening the Strait of Hormuz include demands such as a US military withdrawal, lifting of sanctions, and war reparations, leading markets to reassess the likelihood of a swift return to normal shipping.
This has shifted the trading logic for the oil market.
Over the previous two weeks, oil prices had fallen significantly, with markets primarily trading on expectations of the Strait of Hormuz reopening and a gradual recovery in supply. However, as uncertainty around negotiations and shipping arrangements has reignited, crude oil prices are now repricing the risk of supply disruptions.
On Monday, international crude oil futures were mostly in the green throughout the day. They briefly turned slightly negative before European stock markets opened, but then turned positive and maintained their gains during early European trading. Late in the US morning session, after news of the US SPR falling below 300 million barrels emerged, oil prices accelerated their advance.
Why just 10 ASX 200 shares?
This rally comes after two consecutive weeks of sharp declines for oil prices.
As of last Friday, WTI crude had posted two consecutive days of gains after a three-day losing streak, while Brent crude rose for three days after a two-day decline. However, both benchmark crude oils still recorded weekly losses of 7.67% and 4.98%, respectively. Over the two weeks through last Friday, WTI crude accumulated a loss of 12.46%, while Brent crude fell 13.67%.
In other words, before this rebound, oil prices had already undergone a substantial correction, with markets having largely priced in expectations of the Strait of Hormuz reopening and easing supply risks.
Last Friday, WTI crude for September delivery settled up 89 cents, or 1.15%, at $78.18 per barrel, while Brent crude for October delivery settled up $1.06, or 1.29%, at $83.55 per barrel.
On Monday, oil prices climbed back above the $80 level, indicating that the market is partially recovering the risk premium that had disappeared.
The lower the SPR, the smaller the US buffer against supply shocks
For the oil market, the SPR falling below 300 million barrels does not mean the US is facing an imminent oil supply shortage.
The US still holds substantial commercial crude oil inventories, high domestic crude production, and the ability to source supply from global markets. Therefore, the decline in SPR inventories cannot be simply equated with a crisis in US oil supply security.
However, the role of strategic reserves is precisely to provide an additional buffer in the event of major supply disruptions.
This means that with the Strait of Hormuz still posing supply risks, the continued decline in the SPR will make markets increasingly focus on one question: If the global oil supply faces another severe shock, to what extent can the US government still release strategic reserves to stabilize the market?
While the US SPR currently remains above its historical low of 270.5 million barrels from 1982, it is getting closer to that level.
More importantly, this current inventory level is occurring during a period of significant uncertainty in the global oil supply chain. The Strait of Hormuz handles about one-fifth of the world's oil shipments. Any delay in the reopening process of the waterway could quickly re-inflate the supply risk premium in the crude oil market.
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