The Strategic Petroleum Reserve Strategies: Risk-Free Return or Return-Free Risk?
Like any other storage asset, the Strategic Petroleum Reserve (SPR) represents an option on time. It allows inventories to be shifted forward, providing short-term relief to the market when the demand for a commodity exceeds its supply. The inventory replenishment at a later time implies carrying a short position in the forward market. In the case of the SPR, the management of this short position critically depends on whether inventories are released in the form of a loan or as an emergency sale. In the SPR loan, the short forward position is covered contractually when borrowers return the barrels. If the market is in backwardation, then more barrels must be returned to the SPR than the quantity that was borrowed, and the loan generates a guaranteed positive return to the lender. In contrast, the SPR sale is a bet that barrels can be repurchased at the price lower than the price of the sale. Historically, carrying short forward positions in a backwardated market would have generated large losses, as lower forward prices tend to roll up towards the higher spot price. Not only the strategy of selling oil with a hope to buy it back at a cheaper price takes an enormous amount of risk compared to the strategy of lending oil, but the odds of it generating any positive return to the storage owner are highly unfavorable.