Crude oil prices are climbing once again, propelled by the latest flare-up of hostilities in the Persian Gulf—but also by renewed declines in U.S. crude inventories and a Strategic Petroleum Reserve (SPR) edging closer to critical operating levels.

The significance of oil inventories moved into sharp focus shortly after the United States and Israel launched their war against Iran at the end of February. It was these stockpiles that spared the world a sharp and painful spike in oil prices. The OECD agreed to a controlled release of 400 million barrels, while China slashed its oil imports, drawing instead on its own reserve.

The SPR, created by Congress in the mid-1970s after the Arab oil embargo exposed U.S. vulnerability to foreign supply shocks, was designed for precisely this kind of moment—yet it has rarely been drawn this hard in succession. Its share of the joint drawdown stood at 172 million barrels. American oil production has responded to the supply squeeze, but neither as quickly nor as strongly as some had hoped, as the industry maintains its cautious stance on growth. As a result, the U.S. federal government has been selling oil from the SPR—much of it bound for Europe, which has struggled to secure supply amid its own sanctions on Russian energy and the war in the Middle East.

The latest SPR release, however, comes on top of earlier drawdowns under the Biden administration that had already cut the reserve's available oil substantially and were never fully replenished. That left a much lower starting point for this year's release.

The United States is now set to release another 39 million barrels under the joint OECD plan, which would bring the reserve's crude level down to 243 million barrels, Reuters reported earlier this week. That is a dangerous threshold: the generally accepted operational minimum for the SPR is between 250 and 300 million barrels, below which the reserve may struggle to pump and process oil efficiently. It is also a fraction of the facility's roughly 700-million-barrel design capacity, underscoring how far the cushion has shrunk.

Some industry observers had raised alarms about SPR levels even before the Trump administration took office. Their argument was that the Biden-era releases—most notably the roughly 180 million barrels sold after Russia's invasion of Ukraine in 2022—had driven the reserve to uncomfortably low levels that required rapid replenishment. That replenishment never materialized, although some crude purchases were made after the massive release of 2022. Then the new war began, squeezing supply far more severely than before.

The concern over the SPR is fundamentally physical. As Reuters has explained, the oil in the strategic reserve is stored in salt caverns along the U.S. Gulf Coast, where it floats on a layer of water. The more oil that is drawn from the caverns, the higher the water level rises—and with it the risk of damage to the cavern walls and to the pipes and pumps used to extract the crude. According to a petroleum engineering professor at Texas A&M University, the absolute minimum required for the reserve to exist at all is 70 million barrels, but that figure is largely irrelevant because the practical critical level is around 250 million barrels. Below that point, the reserve becomes difficult to draw upon.

"The core mission of the reserve is to supply the market rapidly during a crisis," Professor Siddharth Misra told Reuters. "But operating below 250 million barrels pushes the infrastructure into a dangerous zone."

If the strategic reserve of the world's largest oil consumer is approaching critical levels, the market loses one of its stabilizing factors. A shrunken SPR means less supply in storage available to blunt future—or ongoing—supply squeezes, which in turn can amplify oil price volatility. That leaves China's oil inventories as the one substantial supply cushion in the event of a new outage. Yet China's stockpiles are no longer where they stood at the start of the year, above 1 billion barrels. Drawn-down inventories tend to make markets nervous.

The U.S. president said this weekend that his administration would refill the SPR with Venezuelan crude, but whether that is physically possible remains unclear. Venezuelan crude is heavy, whereas the crude suitable for storage in the Strategic Petroleum Reserve must be considerably lighter—the kind of crude the facility was designed to hold. Light crude cannot simply be swapped for heavy with no consequences for the infrastructure. One analyst suggested that Trump could sell Venezuelan heavy crude to buy lighter crude for the SPR—but that would take years, according to Kevin Book of ClearView Energy Partners, as quoted by Reuters.

There is also the question of the immediate availability of that Venezuelan oil, and whether Trump genuinely intends to take it as a "Gift from Venezuela to the People of the United States" without payment, or whether the United States would pay for it. Venezuela currently produces oil at a rate of 1.25 million barrels per day.

Until the SPR depletion problem is resolved, higher oil prices can reasonably be expected, especially if the fighting in the Persian Gulf continues.

Source: OilPrice.com — By Irina Slav