Today, the Biden administration announced that they would be releasing 50 million barrels of oil from the Strategic Petroleum Reserve (SPR). They also announced a coordinated release between the U.S., India, Japan, the Republic of Korea, and the U.K.

That sounds really bearish for oil, right? If that’s the case, why are oil and oil stocks rising?

Let’s dig into the details and see how the oil and oil stock markets are trading.

SPR Details

The U.S. plan involves releasing 32 million barrels from the SPR over several months. The 18 million additional barrels will be part of a previously authorized sale. Also, the announcement has been well-telegraphed since the administration has been talking about it for months. The release of the 50 million barrels represents approximately 8.2 percent of the over 604-million-barrel supply.

The Whitehouse discussed the release from the SPR in a press release saying, “The President stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic”.

Not sure that a 50-million-barrel release from the SPR solves the bigger issue and it appears as the oil market knows it.

SPR and Current Oil Supply

If you’re expecting a large drop in oil price on the news, you may have to think again. Looking at the current supply of oil, we’re currently below the 5-year range of oil supply. The image below is taken from the EIAs Petroleum Status Report.

A near-term release of 18 million barrels and 32 million being released in the next few months may carry minimal impact on oil prices. One reason is if all 50 million barrels were released the supply would reach the middle of the historical range. In the end, production needs to rise toward pre-pandemic levels to fix the supply issue. As a result, the supply issues aren’t likely going to be erased by a release from the SPR. This is currently being reflected in the term structure for oil futures.

Oil Futures Term Structure

The term structure for oil futures can be described as normal, contango and backwardation. The SPR has failed to push the oil futures term structure out of backwardation. This is a condition where the price of futures contracts decline as the expiration goes out in time. This is a result of an expected undersupply and is a bullish condition.

Here is a graph of the current futures curve and how it has changed over the past several weeks. Each line on the chart represents every Tuesday over the past five weeks. The red line represents the futures prices for today.

As you look at the graph above, you’ll notice that the red line is a lot flatter than the previous four weeks. This reflects a dampening of bullish interest, but the fact that oil is still in backwardation reflects an overall bullish outlook.

Conclusion

Understanding the oil futures market is a key to trading oil and oil stocks. Having the ability to look at the fundamental and technical picture of oil supplies and expectations is a combination that can be very powerful. Hopefully this gives you a glimpse at how to do this type of analysis and helps you understand how today’s news is being priced in.