The SPR has stopped falling, but 17 million barrels still need borrowers

The US reserve sat flat at 283.0 million barrels for two weeks after falling 132 million since February. The new 17 million barrel offer may struggle, as June's loan round did.

The United States put another 17 million barrels of crude up for loan from the Strategic Petroleum Reserve (SPR) on Friday, Reuters reported. The reserve is already at its lowest level since 1982. The offer matters because it will show whether the programme still has borrowers.

An exchange is a financing trade. Borrowers take crude now and repay it in kind, with extra barrels as interest. They do so only when oil for delivery now costs enough more than oil for later delivery to cover that interest.

In June that price gap narrowed and the offer found almost no takers. The same test now applies to 17 million barrels. The physical drawdown has already stopped.

The reserve stopped falling in the latest two weeks. The EIA weekly series, from the US Energy Information Administration, shows it at 415.4 million barrels on 27 February. By 9 October it held 283.0 million.

That is a loss of 132.5 million barrels, or 31.9 percent. The readings for 2 and 9 October are identical to the barrel, so stocks were unchanged across the two latest weeks.

The fastest week, ending 15 May, took out 9.9 million barrels. The latest week took out none. The stop is sharp for a reserve that had been draining since February.

The line may turn down again. Deliveries under the most recent awards are scheduled for November and December, according to the Energy Department's 29 September release. The department says those deliveries are for awarded exchanges.

A separate hurricane deal adds to that. The department's 10 October emergency exchange of up to 4 million barrels went to Exxon and BP after Gulf storm disruption. Exxon's 2 million barrels speed up crude already awarded. BP's 2 million barrels are a fresh withdrawal, so the line can still fall. Companies return the oil in 2027.

The loan terms make price decisive. Borrowers receive crude now and return the same crude plus extra barrels later. The 29 September release cites a 25 percent premium in returned barrels. Four borrowed barrels therefore become five owed.

That premium works only in one market shape. Backwardation means crude for prompt delivery trades above crude for delivery a year or two out. A borrower can then sell the loaned barrel today and buy back the return barrels cheaply for later. The bid works only if deferred crude stays cheaper than spot by more than the premium. Without that shape, the premium is a plain cost.

The government's side of the trade is simpler but carries more risk. It gets barrels back in 2027 and 2028, not dollars. The taxpayer therefore carries the price risk on the day those barrels arrive.

Reuters reported on 29 September that the return of the oil is not slated to be complete until late 2028. The reserve is rebuilt slowly, and only if borrowers deliver.

June is the precedent. The department offered 40 million barrels from Big Hill and Bryan Mound. With premiums of up to 24 percent, Reuters reported, companies agreed to borrow only about 500,000.

The likeliest reason is a narrower gap between prompt and deferred prices. A lender that offers crude and finds almost no borrowers has learned that the price shape that made earlier loans pay has gone.

The ledger shows how much is left. The US promised 172 million barrels in March, as part of a wider International Energy Agency release of 400 million. The department says its awards before the latest round total more than 133 million.

That leaves under 39 million barrels of the pledge before the round with bids due on 6 October. The department has published no awards for that round.

Reuters called the 29 September round of up to 40 million barrels the release that completes the US share of the accord. A fresh 17 million offer would then be needed only if that round fell short. Our inference: it took about 22 million barrels or less, which is 39 minus 17. The new offer must find borrowers for the rest.

Oil has been firm, and the backwardation behind April's round could return. A rising price helps only if the curve is steep. Take up follows the curve, not the reserve's level.

If the October round was taken in size, the November and December deliveries will pull the line down again. The Energy Department argues that the exchanges refill the reserve and save taxpayers more than $3 billion. That holds only if the oil comes back on schedule.

Returns run into 2028. Until they arrive, the reserve sits at its lowest in more than four decades through the Gulf hurricane season and the war on Iran that prompted the pledge. A borrower that hedges by buying the return barrels forward fixes its cost. If spot and deferred prices converge, as they did in June, an unhedged loan loses money.

The EIA weekly readings cannot yet test the new offer. Any fall in November and December will come from earlier awards and the hurricane loans. Borrowers' appetite for this round will show first in the department's award notice, then in the EIA series from January, once those earlier deliveries are done. The award notice is the first hard number on whether the premium still pays. If awards come in near June's 500,000 barrels, the 172 million barrel pledge ends short by most of the 39 million barrels still open.