For the past several months, hefty withdrawals from America’s Strategic Petroleum Reserve have kept the market afloat. In April, President Biden authorized up to 1 million barrels per day (MMbpd) to be withdrawn from the SPR, which has gone towards balancing US and global markets. By June, the SPR fell below 500 million barrels for the first time since 1986, and the pace of withdrawals has only steepened. With energy prices contributing to 40-yr high inflation rates, it’s no surprise that the SPR has been tapped so aggressively. But the White House says that withdrawals will end on time- prompting questions of what could happen after releases stop.
According to Amos Hochstein, the president’s special coordinator on international energy affairs, releases will end this fall. According to a Yahoo Finance post, he noted that “We can’t be an oil supplier. It’s a reserve and so we have to keep that.” Hochstein added that oil majors have promised to increase production by 800,000 to a million barrels per day by the end of the year, offsetting lost SPR barrels. It’s worth noting that the government’s energy reporting agency, the EIA, expects US crude production to increase by barely half that much.
Looking at the data, oil production has struggled to move beyond 12 million barrels per day on a weekly basis, only exceeding that threshold for a couple weeks in June before dipping lower again. Even with oil prices at extreme highs, producers have been hesitant to ramp up output given the hefty capital costs involved. Adding another 1 MMbpd would put production back at pre-COVID levels.
So far, most of the increase in oil drilling has come from Drilled but Uncompleted (DUC) wells. The EIA shows that DUCs have fallen from over 8,000 wells during the pandemic to just over 4,000 – the lowest number since record-keeping began in 2014. DUCs are a quick and cheap way to jumpstart output, since the well is already drilled and closer to operability. The number of new wells being dug each month, around 950 currently, is only at early 2017 levels, which was the start of the US oil revolution. Simply put, US producers will need to significantly increase rig activity to ensure there are enough oil wells to sustain higher production. As the US decreases its SPR releases, US producers have a lot more work to do to push production to pre-COVID levels.