U.S. showing its swagger in oil reserve sell-off plan
Washington’s move to inject more crude into market flies in face of OPEC efforts
CALGARY Plans by the Trump administration to sell a portion of U.S. strategic oil reserves signals the country’s rising dominance in energy markets, just days before the Organization of Petroleum Exporting Countries decides whether to extend a supply agreement.
As part of broader efforts to reduce U.S. debt levels, the administration’s recent budget proposal includes a plan to sell the reserves over a 10-year period. Under the proposal, sales would peak at US$3.9 billion in 2027, and total nearly US$16.6 billion from 2018 to 2027, the administration said.
The idea is being floated just as members of the OPEC group meet in Vienna on Thursday to discuss whether they will extend a six-month contract to reduce oil supplies. Efforts by the group to raise prices have been hampered by non- OPEC supply growth, particularly U.S. shale producers that have outperformed market expectations by finding ways to produce oil at low costs.
“Even if the volumes involved are small in 2017, OPEC member countries will not appreciate U.S. government policies that plan to add oil to the market at the same time OPEC is trying to do the opposite,” analysts at Barclays said in a recent research note.
Saudi and Russian officials have signalled in recent weeks that OPEC and its allies could extend the agreement by nine months through the first quarter of 2018.
The decision to sell the reserves also represents the growing swagger of the U.S. energy industry, which has become a dominant player in world oil markets.
“I do think that it’s yet more evidence that the U.S. is feeling pretty confident about its oil supply situation,” said Sarah Ladislaw, a senior fellow at the Center for Strategic & International Studies in Washington.
The timing of the announcement is awkward, as it comes days after U.S. President Donald Trump signed a US$110 billion defence deal with Saudi Arabia, in a sign of strategic co-operation with a key ally in the Middle East.
But the long-term strategy of selling the reserves remains unclear, she says. “I think the question is whether or not the U.S. has vulnerabilities in the global oil market, or within our own domestic system. I think that we’ve probably not adequately discussed that issue.”
Other U.S. presidents have similarly meddled with the country’s strategic reserve base. The Obama administration aimed to raise US$5.1 billion between 2018 and 2025 to cover budget expenses, while former president George W. Bush proposed doubling the reserves in response to high prices.
Trump’s budget proposal still needs to pass through U.S. Congress, and is expected to undergo changes before it is approved.
“Most of this budget is aspirational,” Ladislaw says.
The U.S. Strategic Petroleum Reserves (SPR) were established in response to the 1973 Arab Oil Embargo, which cut off global oil supplies and caused prices to spike. Then-Secretary of State Henry Kissinger led U.S. efforts to amass the strategic supply as a way to cushion against potential supply shortfalls.
Today the reserves hold 687.7 million barrels of oil in tank farms and underground salt caverns in Texas and Louisiana. The proposal involves selling 270 million barrels of oil over 10 years above current sales expectations.
Some analysts question whether the U.S. will be legally able to sell more of its crude reserves due to a stipulation by the International Energy Agency that obligates its members to hold at least 90 days’ worth of supply in strategic reserve. The IEA was formed in 1974 in direct response to the oil embargo, and was also a result of Kissinger’s efforts to combat market disruptions.
Michael Cohen, the head of energy markets research at Barclays, says the parameters of that IEA obligation could change due to rising U.S. energy independence.
“The fact that the U.S. is producing a lot more crude than it did in past years makes the storage obligation a little bit lower.”
Oil prices initially fell following news of the proposed sell-off, but analysts don’t expect a significant long-term impact as the sales amount to only 95,000 barrels per day of supply over the 10-year period.
“The oil market impact is going to depend on the timing, because it isn’t that much,” said Ann-Louise Hittle, the vice-president of research at Wood Mackenzie.
If the reserves are sold to the market during times of low seasonal demand, Hittle says, or when refineries are undergoing maintenance, prices could fall as a result.
However, analysts see the SPR sales having little impacts on oil markets. “Typically the markets have so much notice on when these sales are going to be executed that they are already priced in,” Ladislaw says.
Futures contracts for benchmark crude West Texas Intermediate rose nearly one per cent in Tuesday trading to around US$51.50. Brent Crude contracts were also up at US$54 per barrel.
I do think that it’s yet more evidence that the U.S. is feeling pretty confident about its oil supply situation.