President Trump is reportedly considering tapping the strategic petroleum reserve to lower gasoline prices in an effort to neuter a political threat ahead of key midterm elections in November.
Sources told Bloomberg that options are under consideration by the Trump administration, ranging from a minor 5-million-barrel test sale, a symbolic amount, to a more sizable release of 30 million barrels. A more aggressive option could entail a larger release, combined with coordinated stockpile releases from other countries. No decisions have been made.
“An SPR release would have a psychological impact on the market. It may not translate into lower gasoline prices, but it would immediately bring down crude prices, at least temporarily, until the market adjusts,” Joe McMonigle, senior energy analyst at Hedgeye Risk Management LLC, told Bloomberg.
“It’s unclear whether the U.S. will actually use the emergency inventories, but we can at least tell that they feel a lot of pressure from crude trading above $70,” Ahn Yea Ha, an analyst at Kiwoom Securities Co., said in a Bloomberg interview.
National gasoline prices are hovering just below $3 per gallon, the highest price in more than three years. However, the rally in crude oil prices has stalled and reversed over the past week, with Libya in the process of restoring the 800,000 bpd that had been disrupted. News of Libyan oil trickling back online led to a sharp selloff in crude prices last week.
Monday saw another steep decline in prices, and WTI is back below $70 per barrel. Saudi Arabia said that it would expand its production, offering more volumes to Asian buyers. Russia’s energy minister also said that the OPEC+ coalition could add more than the 1 million barrels per day that they agreed to in June, if needed.
Related: Do Crude Producers Really Want Higher Oil Prices?
Moreover, Saudi Arabia said that the OPEC+ group would no longer track compliance figures for individual countries as part of the production cut agreement. Instead, OPEC+ will follow a collective target. The shift will essentially give Saudi Arabia and Russia more room to take market share as production from Venezuela and potentially Iran continues to fall off a cliff.
Iran, of course, rejected the move, but Tehran’s opposition doesn’t have any practical weight on Saudi actions. In any event, Saudi Arabia is already way over its production limit of 10.06 mb/d, having produced an average of 10.49 mb/d in June. "Regrettably, unilateral behaviors in production increase by some member countries is weakening the very foundation of our organization," Iran’s oil minister Bijan Zanganeh wrote to OPEC’s president.
The plunge in oil prices over the past week – Brent is off nearly 8 percent since July 10 – will take some of the pressure off and likely reduce the urgency for the Trump administration to make a decision on an SPR release. There is a lag between movements in crude oil prices and retail gasoline prices, so the price at the pump may not drop for another few weeks. However, if crude prices fail to rebound from after the recent drop, consumers will feel the relief soon enough.
That doesn’t mean that the Trump administration will shelve the idea of releasing oil from the SPR. The SPR has historically only been used in the most extraordinary circumstances, such as war or natural disaster. Previous releases from the SPR include the Iraq war in 1990/1991, in the aftermath of Hurricane Katrina in 2005 and after the disruptions in Libya in 2011.
Related: The New Oil Cartel Threatening OPEC
Politicians once feared the political fallout of using oil from the SPR in the absence of a genuine supply disruption – nobody wanted to be seen tapping the SPR for political purposes. But the political price of dipping into strategic stockpiles has declined significantly over the past decade, largely as a result of perceived abundance as U.S. shale production has soared.
The U.S. Congress has legislated SPR sales for budgetary reasons, undercutting the security rationale behind holding the stockpiles and significantly lowering the political bar that the executive branch needs to clear to release oil from the reserve. It is hard to imagine President Trump suffering political damage from using oil from the SPR and even harder to imagine the U.S. Congress doing anything to stop him.
Nevertheless, whether or not the Trump administration pulls the trigger on an SPR release will largely come down to what happens with oil prices over the next few months. Sources told the Wall Street Journal that a significant release would only come if oil prices rose much higher. For now, the administration is holding off.
By Nick Cunningham for Oilprice.com
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2. As we speak, CI is at 404m barrels, about 4% lower than 5 year average; while SPR is at 660m barrels which is 5% lower than the SPR of 2015. Put these number in perspective: At the daily consumption rate of 18m barrels, the CI will only last 22 days; while the SPR will last bout a month. 3. CI is a tool in managing the commercial market of crude consumption, SPR is a tool only for the government as the last resort for national disaster and emergency. 4. Crude price today at $72 a barrel, it only has economic implications to our general economy, though we are not at a national disaster or emergency, that is why the commercial inventory is there for, be used to provide the buffer for commercial market supply. Under no circumstance, SPR can be justified to be used to manage the commercial market unless CI has been exhausted. 4. During the year 2010 -2014, the crude price stayed between $90-$110 a barrel, except during the Libya crisis, SPR was never tapped to intervene the commercial market during that 5 years; so crude at $72 today, what is the justification, even to consider to tap the SPR ?
They would have soon get the message. Same with food exports. Let's see them eat sand.
Nice guys finish last.
I also understand Russia wanting to increase production for a different reason. The overwhelming bulk of Russia’s oil production is produced by privately-owned companies with a small government stake. They have been investing heavily for the last few years so they now want a return on their investments. Moreover, Russia’s economy can now live with an oil price of $40 or less a barrel as a result of the diversification of the Russian economy since the oil crash in 2014.
What I can’t understand is Saudi Arabia increasing oil production against the wishes of OPEC and also against the vital interests of its own economy and the economies of OPEC members just to help President Trump’s party win the November elections. Saudi Arabia and the majority of OPEC members need an oil price of $80-$100 a barrel to balance their budgets. Moreover, the Saudi economy was the most adversely affected as a result of the 2014 oil price crash.
If Saudi Arabia believes that US sanctions on Iran are going to lead to a shortfall in Iranian oil exports leading prices to surge very high, then they will be confounded by the reality that the sanctions will fail.
Their cosiness to the Americans is well documented. Since the discovery of oil in Saudi Arabia at the start of the 20th century, the Saudis have quenched American thirst for oil, financed their wars and done their biddings. Is it not time for them to start looking after their own interests and the interests of their own people and economy. They should realize that the United States is part of the problem for Saudi Arabia and not part of the solution. The US and Israel will drag Saudi Arabia and the whole Gulf region into a war with Iran that could be damaging to all of them. The Saudis should realize that the risk of American litigation against them vis-à-vis the 9/11 will always be like a Damocles’ sword over their heads.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
The SPR is from a time that no longer exists.