Let's Talk About the SPR (Again)

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Valero, Marathon top beneficiaries of U.S. emergency oil releases

Oil refiners Valero Energy Corp VLO.N and Marathon Petroleum Corp MPC.N are the biggest beneficiaries of the U.S. government's oil reserve releases, taking nearly half the crude offered, a Reuters analysis of Department of Energy data showed on Wednesday.

The Biden administration has opened spigots at the nation's Strategic Petroleum Reserve (SPR) to lower fuel prices and ease a supply crunch from Russia's invasion of Ukraine. Awards of about 218 million barrels for the 12 months ended Sept. 30 have tamed market worries and cut energy prices.

But they have slashed the reserve to 427.2 million barrels - or about four weeks of demand - the lowest level in about 38 years. This has sparked criticism because some oil was resold to buyers overseas. A few distributions came under congressional mandates while others are pending.

The two biggest receivers acquired nearly 98 million barrels so far. Valero, the second-largest U.S. refiner by capacity, secured 52.7 million, while top oil processor Marathon Petroleum snapped up 45.2 million barrels.

Other big buyers included Exxon Mobil XOM.N, with 24.7 million barrels, and Motiva Enterprises MOTIV.UL at 22.1 million, Shell SHEL.L at 15.2 million and Phillips 66 PSX.N at 16 million. -Reuters

COMMENTARY: Here is what I believe is happening, regarding this dislocation of price versus the actual physical market. Most of this oil was sold via auctions at prices determined by a five-day average around the date of delivery. Refiners have every incentive not to go to the futures or OTC markets because they know that the SPR is there. The point is why step in when the market is "cheap" and when you know you can buy from SPR. Take for example VLO who is only a buyer of physical oil. If they use the futures market to sell it’s a hedge against a cargo but it's a no lose situation to abandon the futures market or at worse pressure it because you know the SPR is there for you.  In a tight market, you have to secure a seller when storage is empty so you may buy futures as a last resort or hedge to assure you have the molecules. The SPR release eliminates the need for the futures market or the OTC market because everyone knows it's coming, so, why not sit back sit back and wait for the price to go lower? This also explains a bit of the horrific lack of liquidity right now.

The real question is when do the physical players start to price in the end to SPR and need to go out and secure molecules in a very tight market, which in turn will surely cause a spike in prices.

I think the administration knows that is exactly what is going to happen because just last week they push out the remaining 10 million barrels of releases into November. Releases were supposed to be completed by the end of October which means refiners would have had to start looking for products beyond the SPR mid-October. Likely ensuring an oil price spike right into midterms.

My last thought, when faced with complex and difficult to quantify risks, markets usually default to shorter-term fundamentals and prevailing biases rather than macro winds. We are seeing that play out now.

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