Informing SPR Policy Through Oil Futures and Inventory Dynamics

Resources for the Future Working Paper 17-19

26 Pages Posted: 4 Jan 2018

See all articles by Richard G. Newell

Richard G. Newell

Duke University - Nicholas School of Environment; National Bureau of Economic Research (NBER); Resources for the Future

Brian Prest

Duke University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2017

Abstract

We examine how information on the time pattern of expected future prices for crude oil, based on the term structure of futures contracts, can be used in informing whether to draw down, or contribute to the Strategic Petroleum Reserve (SPR). Such price information provides insight on expected changes in the supply-demand balance in the market and can also facilitate cost-effective transitions for SPR holdings. Backwardation in futures curves suggests that market participants expect shocks to be transitory, creating a stronger case for SPR releases. We use vector autoregression to analyze the relationship between the term structure of futures contracts, the management of private oil inventories, and other variables of interest. This relationship is used to estimate the magnitude of the impacts of SPR releases into the much larger global inventories system. Under the assumption that strategic releases can be modeled as surprise inventory additions, impulse response functions suggest that a strategic release of 10 million barrels would temporarily reduce spot prices by about 2% to 3% and mitigate backwardation by approximately 0.8 percentage points. Historical simulations suggest that past releases reduced spot prices by 15% to 20% and avoided about 5 percentage points of backwardation in futures curves, relative to a no-release counterfactual. This research can help policymakers determine when to release SPR reserves based on economic principles informed by market prices. It also provides an econometric model that can help inform the amount of SPR releases necessary to achieve given policy goals, such as reductions in prices or spreads.

Suggested Citation

Newell, Richard G. and Prest, Brian, Informing SPR Policy Through Oil Futures and Inventory Dynamics (November 2, 2017). Resources for the Future Working Paper 17-19, Available at SSRN: https://ssrn.com/abstract=3094419 or http://dx.doi.org/10.2139/ssrn.3094419

Richard G. Newell (Contact Author)

Duke University - Nicholas School of Environment ( email )

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Brian Prest

Duke University ( email )

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