Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
[Myra Saefong, MarketWatch]
2018 budget proposal includes 10-year sale of 270 million barrels of reserve oil.
At a time when major oil producers have been struggling to ease a global glut of crude supplies, the Trump administration has proposed the sale of nearly half of the oil from the U.S. Strategic Petroleum Reserve under its 2018 U.S. budget plan.
For the oil market, it seems like a bad idea—but to some experts, it’s not quite as horrible as it sounds.
The news early Tuesday came ahead of Thursday’s much-anticipated meeting of members of Organization of the Petroleum Exporting Countries and other major oil producers, who are expected to decide on whether to extend a six-month production cut agreement that’s poised to expire in June. The market widely expects producers to extend the pact, possibly by nine months.
If the U.S. budget proposal is passed, the sale of reserve oil would start in October of 2018, said Phil Flynn, senior market analyst at Price Futures Group. That “could slow the global oil market rebalancing.”
“Of course, the president has the right to authorize sales from the reserve oil anytime he wants but in this case, it would have to be part of a budget package that still has major hurdles to go through on both sides of the aisle before it could pass,” he said.
The SPR currently has about 687.7 million barrels of crude oil in it, but the sale amount would total about 270 million barrels after “current law sales,” according to the budget plan from the White House.
The Energy Department was given clearance in December of 2016 to sell up to $375.4 million worth of oil from the SPR in fiscal year 2017 to generate revenue for operational improvements.
Over the next 10 years, the Trump administration expects the latest proposed SPR sale to cut the federal deficit by roughly $16.6 billion.
Not a flood
At first glance, the total amount of oil that would hit the market seems huge, but some analysts pointed out that it’s not.
The sale of 270 million barrels would be conducted over a 10-year period and work out to roughly 74,000 barrels a day.
For reference, U.S. field oil production was at about 9.3 million barrels a day for the week ended May 12, according to the Energy Information Administration. The International Energy Agency, meanwhile, forecasts world oil demand at 97.9 million barrels a day this year.
Even if the 10-year total sale figure was closer to half the amount of oil in the reserve, or about 344 million barrels, or around 100,000 barrels a day, that would be “negligible,” said James Williams, energy economist at WTRG Economics. “This is not a market mover.”
Indeed, oil futures prices Tuesday didn’t show much of a reaction to the news either. West Texas Intermediate crude CLN7, +0.61% touched a low of $50.57 a barrel, while Brent crude LCON7, +0.50% traded as low as $53.20. On Tuesday afternoon, prices were trading a bit higher for the session.
Oil analysts see some rationale behind the proposed SPR sale.
U.S. “shale oil output has reduced the need for the reserve, so [the Trump administration is] looking at the oil as an asset to help out with the budget,” said Flynn.
Troy Vincent, oil analyst at ClipperData, said “there isn’t the need for the massive stockpiles that we had under an outlook of shrinking domestic supply,” and “if domestic production growth outpaces the rise in exports over the coming year,the volume of SPR available to offload will grow.”
Still, “seeing as the budget deal will face many revisions in the coming weeks, and is unlikely to pass in short order, this should have little implication for near term pricing and supply and demand balances,” said Vincent.
At the same time, some analysts question whether the sale would be the right move.
“Having the current 688 million barrels in storage is wise from a strategic point of view especially since we also use it to help others in an emergency,” said Williams.
“What is the probability of a 1-2 million [barrel-per-day] supply interruption in the next decade? Very high,” he said, adding that Venezuela raises that possibility.
Williams said the SPR would cover imports for about 138 days. Reducing the SPR would be “risky,” he said.
“It’s an insurance policy we may never use, but it is nice to have,” he said.
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