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
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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.
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.
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.
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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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