Source: Golden Ten Data
This is the first time that the US government has set a clear price cap, which is still higher than the previous unofficial limit of 79 US dollars/barrel.
The Biden administration raised the level of oil prices it is willing to pay in order to supplement the country's strategic oil reserves. Currently, America's strategic oil reserves have been reduced to their lowest level in nearly 40 years.
The US Department of Energy said in a document that it will pay $79.99 per barrel of oil. This is the first time that the US government has set a clear price cap. This price is higher than the previous unofficial ceiling of $79 and is close to the market price. The US Department of Energy has also changed the pricing formula to allow potential bidders to better hedge their positions.
“I'm happy to finally see that the government has a more market-based mindset,” said Ilia Bouchouev, a former trader who teaches at New York University and is currently managing partner at Pentathlon Investments.
Traders have complained about rules for selling oil to the government, which they say have not kept up with changing risk management practices in times of turmoil and geopolitical uncertainty.
According to the new rules, the price is set on the same day that sellers are told they have won the bid, which allows traders to quickly launch the hedging mechanism. Previously, prices were determined on the basis of 3 trading days starting from the announcement date, and can be extended to 5 days if announced on Friday.
In times of geopolitics and turmoil caused by hurricanes, the US government released its strategic oil reserves several times to reduce oil prices. Two years ago, after the Russian-Ukrainian conflict and soaring gasoline prices heightened concerns about inflation, the US released 180 million barrels of oil in an unprecedented manner. It's a tool that has been closely watched by oil watchers, as turning on the “tap” could cause crude oil prices to drop.
Currently, the US Department of Energy is seeking to purchase 3.3 million barrels of sulfur-containing oil. The deadline for bidding is May 14 and is valid until May 23.
Recently, discussions have resumed. If the conflict between Israel and Hamas escalates, leading to an increase in oil prices, leading to a rise in gasoline and diesel prices for American drivers, then the US may once again release strategic oil reserves.
Energy consultant Amos Hochstein said Biden will use crude oil from strategic oil reserves if needed, and indicated that there is enough oil in the reserves. He said:
“We have been replenishing our strategic oil reserves over the past few months. I think we have enough reserves to address any concerns in the economy if we need them.”