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
[Catherine Traywick, Bloomberg]
President Donald Trump has proposed selling off more than half of the U.S. emergency oil stockpile, potentially putting more crude on the global market, even as OPEC works to prop up prices.
A budget proposal released Tuesday includes a plan to sell 270 million barrels of oil from the Strategic Petroleum Reserve over the next decade, a move the White House says will trim the national debt by $16.6 billion. That’s on top of a nearly 190 million-barrel drawdown planned from 2018 through 2025.
At the same time, ministers from the Organization of Petroleum Exporting Countries and its allies are gathering in Vienna to decide whether to extend oil-production cuts to reduce a worldwide fuel glut.
White House Budget Director Mick Mulvaney told reporters Tuesday that drawing down the reserve wouldn’t harm domestic oil prices as long as “you do it slowly over time.” But analysts counter that releasing millions of barrels of oil into an already oversupplied market could depress prices and hurt future production.
“Every sale has an impact,” said Kevin Book, managing director of ClearView Energy Partners in Washington. “In the short term, it’s significant, and in the long term, it’s indifferent.”
OPEC and 11 non-member producers are weighing whether to extend output cuts for nine months after agreeing last year to reduce production by as much as 1.8 million barrels a day from January through June. The move has been undercut by rising U.S. output, which has slowed the expected elimination of a global fuel glut.
Congress has already ordered the U.S. Energy Department to sell 25 million barrels of reserve oil in fiscal 2018 to fund government programs. The Trump proposal would draw down the reserve even more. Sales could start as soon as this October, boosting year-end inventories.
“From a producer standpoint, that’s not such a great thing,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “For OPEC, it could be a problem because they’re doing everything they can to drain inventories.”
The proposed drawdown would have a bigger impact on the U.S. Gulf Coast, where the reserves are located and where the crude would likely be processed, than on the global market, according to Goldman Sachs Group, Inc.
The volume of the sales is “negligible” compared with the size of the global market and OPEC cuts, Goldman Sachs analyst Damien Courvalin wrote in a note. But the sales would keep U.S. crude inventories from normalizing, leaving “more oil in the U.S. than the 5-year average level would imply,” he said.
In the long-term, the effect on the global market would be “negligible” relative to the size of OPEC’s output curbs.
“Impact locally would likely prove more important than on the global market, given the sharp ramp up in U.S. drilling and the steady production growth we expect will require new infrastructure capacity, from moving oil to the coasts to increasing exports,” Courvalin wrote in the note.
Recent sales have reduced the SPR by 7 million barrels so far this year, based on weekly Energy Department figures. The administration is targeting 16 million barrels in deliveries in the first half of the year.
The reserve, established in the wake of the Arab oil embargo of the 1970s, is the world’s largest supply of emergency oil. It contains 687.7 million barrels in salt caverns and tanks in Texas and Louisiana, which allow for quick distribution when natural disasters or unplanned incidents occur. The budget proposal would shrink the stockpile to less than 260 million barrels.
Unlike other aspects of the president’s budget, Trump’s plan to tap the reserve may have support in Congress, which has voted three times in the past two years to sell crude from the stockpile. It has earmarked 190 million barrels — about 27 percent of the reserve at the time — to raise money for unrelated government programs.
“Congress has already decided to reallocate the U.S. oil portfolio to other things and we don’t expect that to change,” Book said.
Cutting the reserve to the degree proposed by Trump would require statutory changes, which would take time, and congressional approval. But he can unilaterally eliminate the Northeast Gasoline Supply Reserve, an emergency stockpile created in 2012 after Hurricane Sandy left some New York-area stations without fuel. The White House would dispense with the gasoline stash in 2018, and sell its entire 1 million-barrel inventory.
Long term, reducing the oil reserve might be a good thing for the market, said Carl Larry, principal at Oil Outlooks and Opinions LLC, in Houston.
“The longer-term effect is going to be very supportive of the market,” he said. “If you take away the backup supply, you prop up the price of oil.”
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