Why trading houses are set to take advantage of US strategic oil reserve release

The release of oil from US strategic reserves has been a boon for commercial companies, many of which have participated in the government program for the first time in years thanks to a beneficial market structure.

Trafigura Group and Macquarie Group were among the traders that obtained oil from the Strategic Petroleum Reserve in an exchange agreement with the Department of Energy.

Merchants are set to take advantage of what’s called backwardation, a price structure in which the cost of oil for immediate delivery is higher than it would have been in the future.

Oil prices rose to their highest level in more than seven years on Friday and posted their sixth consecutive weekly gain as geopolitical turmoil exacerbated concerns about tight energy supplies.

On a weekly basis, benchmark contracts made their longest winning streak since October.

The Biden administration has released oil from the Strategic Reserve in an effort to cut fuel costs that are adding to the worst inflation streak in the United States in nearly 40 years.

Gasoline has risen to its highest price since 2014, as crude prices rose 55 percent last year, prompting President Joe Biden to coordinate the release of crude with countries such as India and China.

The release covers about six days of supply to refineries on the US Gulf Coast.

Trading companies can sell oil immediately to refiners at current prices – WTI is trading as high as $80 – and are expected to pay back in some cases by September 2024, at a price currently about $20 a barrel lower on the forward curve.

Dealers said they can take profits by buying call options that will give them the right to buy WTI at a high of $60 when it’s time to return the crude.

The Department of Energy has offered to lend 32 million barrels to the fuel industry, on the condition that they return it with oil by 2024.

So far, 68 percent of the total supply has been given away, with trading firms taking at least half. The loan is part of the 50 million barrel liberation.

Sources said trading houses had struck supply agreements with refineries when the crude launch was announced.

It is unlikely that some refineries took SPR crude directly because it would be cost-effective to provide the letter of credit needed to cover the entire two-year period to return the oil.

Traders said other trading companies and refineries chose not to participate in the exchange because that would mean spending more on blends to meet quality standards when the oil was paid off.

Blending can be costly because the caves have historically held a mixture of local and foreign ore grades. Borrowers will also have to secure storage tanks and other logistics to eventually return the crude to the government, consuming potential profits.

Updated: January 29, 2022, 2:51 pm

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