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What the SPR Refill Means for Oil Futures

Amanda Townsley, CME Group


  • To ease market tightness, Strategic Petroleum Reserve levels were reduced by 218 million barrels, bringing inventories to their lowest levels since 1984
  • Efforts to restore the SPR could establish an “SPR floor” for crude oil prices, with more stability for prices further into the future

There’s a new oil buyer coming to town, and its already shaking up the oil futures curve. At the end of 2023, the Biden Administration plans to replenish the U.S. Strategic Petroleum Reserve.

In Fall 2022, the administration announced a target price band for purchases: the U.S. Department of Energy (DOE) is a buyer of forward crude oil in the $67-72 price range. The ability of the U.S government to transact at a fixed price out forward is new, thanks to a new rule finalized by the Department of Energy in October 2022. Historically, regulations permitted the DOE to enter forward contracts but only at a floating index price.

The depletion of the Strategic Petroleum Reserve (SPR) in 2022 was planned by the Biden administration to help ease the market tightness exacerbated by the war in Ukraine, and put a cap on the soaring crude oil and gasoline prices earlier in the year. Stock levels are down by 36% -- 218 million barrels – bringing inventories to the lowest level since 1984.

The SPR Floor

A buyer of forward crude oil provides potential for the prices of crude oil futures for 2024+ delivery to be well-supported, a factor that has been referred to by some as the “SPR Floor” for oil prices.

When oil balances loosened over the second half of 2022, nearby oil futures prices fell sharply lower, but longer-dated prices remained relatively firm. The December 2024 WTI futures contract in the chart below fell $3 per barrel between November 1 and December 7, while the January 2023 contract fell by over $15. The spread between these two futures contracts declined by $11 per barrel – reminding traders that, at times, spreads can be even more volatile than the underlying future.

Oil prices at the front of the futures market are largely influenced by the need for the physical spot market to balance. If inventories are very low, nearby prices may rise to levels that slow industrial activity or create substitution with alternative energy sources – well above the longer-dated futures prices. If inventories are building, nearby prices will fall below forward futures prices to create economic carry – the incentive for participants to store crude oil. In cases of significant oversupply, they can fall to levels that provoke producers to slow production or OPEC to act.

The differences in the perception of value at the front of the futures curve and the back of the futures curve helps to drive fluctuations in the shape of the curve – or the spreads between the price of futures for delivery at different points in time. Factors impacting price formation across the curve are highly studied in academic journals – and scrutinized by traders looking for opportunities in oil spreads.

Longer-Dated Futures Prices

At the back of the curve, the concept of perceived support or a “floor” isn’t a new one. Longer-dated oil futures prices have often been bound by the perception of the marginal cost of oil production needed to balance the market. This can create less volatility in the forward futures prices.

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For most of 2015 through 2019, the world’s longer-term oil needs were expected to be met at around $50-$55 per barrel. Oil futures prices falling below these production breakeven levels would bring in producer buying – that is, covering hedges – providing stability to longer-dated futures prices. Opportunistic traders at hedge funds or commodity trading houses may also choose to step into the market and buy futures near these levels.

But expectations for long term oil prices can shift. From 2009 to 2013 analysts largely expected that oil prices of $80-85 were needed to create sufficient investment in new oil projects to offset declines and meet growing global demand. But an underestimate of U.S. shale production and increased stability in Middle Eastern supplies led to a sharp reset in this level. During 2015, the five-year-forward price of crude oil dropped to a low of $50. The spread between prices for nearby delivery and these longer-dated values flipped from positive $20 per barrel to -$15 per barrel as inventories began to build and expectations for high inventory persisted.

Stability in longer dated crude values can mean greater volatility for crude oil spreads, and a unique opportunity for traders. Crude oil futures spreads offer lower margin: a spread position can require only 10-20% of the initial margin of an outright futures position.

The U.S. government as a new buyer of forward crude oil adds a fresh dimension for futures traders to keep an eye on, and adds new prospects for asymmetry in prices and oil spreads in the coming years.

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