U.S. strategic petroleum reserve: a crisis putting pressure on consumers

XTI/USD

Key zone: 76.50 - 81.50

Buy: 83.50 (on a pullback after retesting 81.50); target 85.00-87.50; StopLoss 82.80

Sell: 76.00 (on strong negative fundamentals); target 73.50; StopLoss 76.70

The U.S. oil market is entering a dangerous phase. Crude oil inventories at key storage facilities continue to decline, while the U.S. Strategic Petroleum Reserve (SPR) has fallen to its lowest levels in several decades. While authorities have relied on accumulated reserves to contain global oil prices, the market is gradually facing a new challenge: reserves are shrinking just as global demand begins to recover.

For traders, this means the oil market is becoming significantly more sensitive to geopolitical shocks, while the probability of sharp price swings continues to increase.

Reminder:

Strategic petroleum reserves are one of the key pillars of a country's energy security. If inventories approach the so-called "tank bottom," the government's ability to stabilize the market during a crisis becomes substantially more limited.

By the end of the week, crude oil inventories at the Cushing storage hub had fallen below 20 million barrels. At the same time, the U.S. Strategic Petroleum Reserve (SPR) declined by another approximately 5.1 million barrels, to 311.4 million barrels—the lowest level since March 1983.

Total U.S. crude oil inventories, including both commercial stocks and the Strategic Petroleum Reserve, fell to 726.2 million barrels as of July 10. Over the recent period, inventories have declined by 129 million barrels, reaching their lowest level since 1984.

Investor attention is focused on Cushing—the largest logistics hub for WTI crude oil deliveries. The storage facility has a capacity of approximately 94 million barrels, although its officially defined minimum operating level, commonly referred to as the "tank bottom," has never been publicly disclosed.

Concerns have intensified as the spread between WTI and Brent turned negative. This indicates that U.S. crude is trading at a premium to the European benchmark in the domestic market, indirectly signaling a shortage of readily available physical supply.

Cushing is the delivery point for physically settled WTI futures contracts. If market participants begin demanding physical delivery on a large scale while available inventories prove insufficient, the resulting pressure could extend beyond the physical oil market and affect the exchange infrastructure itself.

Throughout the Middle East conflict, the United States consistently used its strategic reserves as a tool to stabilize global oil prices. At the very beginning of the crisis, President Trump warned that a possible blockade of the Strait of Hormuz could trigger a large-scale global oil shock.

To limit price growth, approximately 172 million barrels of oil have been released from the SPR over the past 100 days. Since the beginning of the U.S.-Israeli conflict against Iran, the Strategic Petroleum Reserve has declined by 104.04 million barrels.

The private oil sector has also shown little urgency in offsetting declining inventories through additional production. After initially increasing output, companies shifted their focus toward selling previously accumulated reserves.

The economic rationale is straightforward: a significant portion of these inventories was accumulated when oil prices were substantially lower and later sold during the military conflict, when crude prices had risen sharply. Under such conditions, generating quick profits proved more attractive than investing in the development of new oil fields.

Meanwhile, risks to the global oil market continue to accumulate.

• European Union countries have also actively drawn down their own strategic reserves. All 32 member states of the International Energy Agency (IEA) participated in the largest coordinated release of emergency oil stocks, supplying approximately 400 million barrels to the market. These additional volumes helped reduce Brent prices by roughly $20 per barrel.
• At the same time, China is gradually returning to the market. Unlike Western countries, Beijing made very limited use of its Strategic Petroleum Reserve during the Strait of Hormuz crisis while simultaneously reducing exports of refined petroleum products.
• Instead, China relied heavily on commercial inventories and reduced refinery utilization to multi-year lows. Now, the recovery in purchases by Chinese oil traders—estimated at approximately 5 million barrels per day—could once again tighten conditions in the global oil market.
• Additional demand is also being generated by Japan, India, Pakistan, and several other Asian and African countries. Over the next two to three years, their combined oil demand could amount to hundreds of millions of additional barrels.

What does this mean?

The global oil market is gradually entering a phase of structural supply deficit. Declining strategic reserves coincide with recovering global demand, while the ability to quickly offset potential supply shortages is becoming increasingly limited.

Without a significant increase in oil production, any renewed geopolitical escalation could trigger a sharp surge in oil prices and substantially increase volatility across the entire energy sector.

For traders, this supports maintaining a moderately bullish medium-term outlook on oil. At the same time, aggressive short positions appear increasingly risky.

Particular attention should be paid to IEA inventory statistics, OPEC+ production decisions, China's import dynamics, and developments in the Middle East.

So we act wisely and avoid unnecessary risks.

Profits to y’all!