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Trump won’t gamble with US strategic oil stocks despite supply disruption risks

Public Policy

Keeping fuel prices low is a political priority for US President Donald Trump. Just don’t bet on him gambling with America’s emergency oil stocks to achieve a second term in office, at the risk of jeopardizing energy security for the world’s largest economy.

Created in the early 1970s, soon after the oil shock caused by OPEC’s disastrous response to the Yom Kippur war, the Strategic Petroleum Reserve (SPR) remains arguably America’s most important economic buffer. Ironically, the first oil pumped into the giant salt caverns acquired by the US government was shipped from Saudi Arabia.

The SPR was created to ensure the US would never again be held hostage by the oil-rich Persian Gulf states, which still wield phenomenal power to influence the price of the world’s most important commodity. The embargo caused oil prices to quintuple. Fuel rationing was imposed, and a 55mph speed limit was introduced to keep consumption in check and avoid an economic catastrophe.

Today, the SPR contains almost 650 million barrels of crude, which is enough to meet the nation’s total demand for over a month. Two-thirds of this crude is considered to be of a sour viscous grade, ideal for the majority of US refineries and processing plants. Although presidents have the right to tap into the stockpile in cases of “severe energy supply interruption”, its use is tightly regulated.

President George Bush opened the taps to the reserve on the day Operation Desert Storm was launched against Iraq in 1991. Over a decade later, his son used the SPR to provide supplies to refineries soon after Hurricane Katrina devastated supply chains in the Gulf of Mexico. More recently, President Obama decreed in 2011 an emergency release from the SPR to prevent rampant oil prices, which had climbed to $120/b following the collapse of Libya’s government, from derailing the recovery from the financial crisis.

The danger is that such releases can distort markets by providing short-term relief to economic events. Upsetting the physics of supply and demand with artificial stimulus can have long-term consequences. By 2014, supply concerns had abated, causing an oil price crash that threatened to bankrupt petrodollar economies like Saudi Arabia.

Current risks to crude flows

The latest tension between Iran and the US after President Trump imposed new sanctions has again highlighted the importance of the SPR. Tehran has threatened to shut the Strait of Hormuz, and attacks on oil infrastructure in the Gulf along with supply disruptions in Venezuela and elsewhere could provide the necessary excuses for a drawdown should oil markets panic.

However, this would probably be a last resort for the Trump administration. The president and his inner circle are thought to consider the SPR a trump card in their hand, only to be played when all other options to cool prices have been exhausted. With US crude trading below $60/b this isn’t an issue. Trump’s alternative strategy of pursuing closer ties with Saudi Arabia, while intimidating OPEC on Twitter, is working without such drastic measures.

The rise of US shale oil has also raised doubts over whether the SPR still has a role. The US government expects domestic oil output to reach 13 million b/d by next year, consolidating America’s position as the world’s largest producer. Under these circumstances it could be argued that the SPR could be drained to provide a modest financial windfall without any risk to the economy.

To a certain extent, a slow bleeding of the SPR is already under way. Congress has passed legislation for the Department of Energy to sell around 290 million barrels from the SPR by the end of the 2027 fiscal year. Last month, officials were also jawboning about the possibility of using the reserve to blunt any oil price spikes. Such action has proved unnecessary.

Oil stocks prove their value

Of course, the US isn’t the only major consumer with significant reserves of crude in storage. The International Energy Agency requires its members hold the equivalent of 90 days worth of oil imports based on figures for the previous year. The recent shutdown of the 1 million b/d Druzhba pipeline system, after contaminated Russian crude was discovered, forced Poland, Hungary and the Czech Republic to release stocks.

“It’s proved that the system does work,” Neil Atkinson, the head of the International Energy Agency’s oil industry and markets division, told S&P Global Platts. “Stocks are there to deal with issues like this and it would appear that the worst fears that this incident would bring about have not happened so far.”

Meanwhile, emerging economies are also building their own strategic oil stockpiles. China has amassed almost 300 million barrels to safeguard its economy from volatile oil markets. India is building enough strategic storage to salt away 90 days’ worth of imports in case of severe supply disruptions.

Even major producing nations in the Middle East now see the benefits of holding limited strategic stockpiles. Abu Dhabi has sanctioned the construction of its own reserve. Its storage caverns will be chiseled into the Hajjar Mountains surrounding the Port of Fujairah. Once completed, the project will hold around 40 million barrels of crude and help to ensure the country can continue supplying if the gateway to the Persian Gulf is ever blocked.

With so many potential threats of disruptions to oil supplies globally, maintaining strategic reserves has never been more important.


13 Comments on "Trump won’t gamble with US strategic oil stocks despite supply disruption risks"

  1. joe on Tue, 28th May 2019 8:23 am 

    Good idea, bad policy. The price of oil is influenced most by the strength of the dollar. It was the dollar value that oil suppliers recieved that sunk Saudi Arabia and Russia. Now that oil is abundant again it’s price is being held up by war threats and unknowns. With Libya still down and Venezuela under economic war then its almost certain that it won’t take much to push up the price. Its a finely balanced system. If prices spike too much (say a conflict with Iran), the reserve will have to be used but prices will still spike. Interest rates will have to go up as well. That will kill off tight (shale) oil, then the whole system unravels. One day the FED is gonna come looking for its due, why should it simply print money at low interest forever. A rise in rates could kill off even 20-30% of shale oil, then where does that leave the US, not the worlds top producer anymore…..

  2. Robert Inget on Tue, 28th May 2019 1:35 pm 

    ‘There are problems’: Russia’s dirty oil crisis is worse than almost anyone predicted
    “Despite repeated pledges from Russian authorities to resume shipments in days, the crisis is proving bigger, longer and costlier than almost anyone expected and a solution could still be weeks away.

    “So far the resumption of flows along Druzhba has been progressing very slowly,” Vienna-based consultant JBC Energy GmbH told clients. “Negotiations and payment arrangements here could well take some time, delaying the full resumption of flows.”

    Then there’s the mystery of what’s happening to Russia’s crude oil while Druzhba is shut. According to official data, output has barely dropped over the last four weeks, falling from 11.23 million barrels a day in April to 11.15 million barrels a day so far in May. But the country is shipping roughly 1 million barrels a day less than normal, about a tenth of its output.

    That’s led oil traders to puzzle on how Russia’s been able to maintain production, asking whether it has the millions of barrels of empty storage needed to hoard the crude that hasn’t flowed through Druzhba for four weeks.

    Spokesmen for Transneft and Rosneft PJSC declined to comment.

    As the weeks pass, the price tag soars. Speaking privately, more than a dozen oil traders and refining executives in London, Geneva and Moscow said the cost may reach $1 billion. The estimates are based on the volume of oil contaminated and the $10-to-$20-a-barrel discounts refiners are asking to take the tainted barrels. The traders and executives spoke on condition of anonymity to avoid upsetting their commercial relationship with Russia.

    “The Druzhba pipeline issue should cap Russian supply for the time being,” said Ed Morse, head of commodities research at Citigroup Inc. in New York.

    Although Moscow has yet to give its own estimate, Western traders also believe the problem will prove larger and take longer to resolve than many predict. Russian oil officials talk about 20 million barrels contaminated, but oil traders and refining executives believe the real number may be closer to 40 million.

    The larger the amount, the bigger the problem: the polluted crude will need to be blended very slowly to bring the chloride levels down to acceptable levels, on a 1-dirty-to-10-clean barrels ratio most likely. That process may well take months, not weeks. So far, refiners in Poland have experimented with blending and struggled.

    “The Russian crude can only:

  3. Robert Inget on Tue, 28th May 2019 1:40 pm 

    Always buy synthetic lube oil.
    (it’s made with natural gas. Pick high detergent
    (for diesels) Your Gasoline engine will run cleaner.

  4. Dredd on Wed, 29th May 2019 7:16 am 

    Trump won’t gamble?

    He gambled away his gambling casinos didn’t he (The Shapeshifters of Bullshitistan – 13)?

  5. Robert Inget on Wed, 29th May 2019 9:52 am 

    Just received info that crude imports are 5 to 6 MM barrels less for PADDS1,3 and 5

    With no SPR released this week, the odds favor a crude draw for the week.

    (Trump has been dipping into SPR for months in order to show surplus storage)

    WTI Oil prices hit $59 in week-end trading only to be knocked back Tuesday and today to a low of $57.20. I’m looking for a close Friday OVER $60.

    REAL jumps will come in early June and July as
    imports fail to show. Remember, it’s six weeks today as nearby Venezuela is out of the picture.

    WE know how many ships are at sea.

  6. Robert Inget on Wed, 29th May 2019 10:28 am 

    Canada; Imports/exports higher.
    Domestic consumption, also higher.

    (Canada is our # 1 crude oil supplier Bar None)
    Canada is our biggest trading partner, Bar None.

  7. Robert Inget on Wed, 29th May 2019 10:36 am 

    Post Muller TV ‘news,’ oil went lower.

    IMO Congress has little choice but to call for the ‘I’ word. (incest)

  8. Robert Inget on Thu, 30th May 2019 8:23 am 

    Last week will make the first in months that Trump hasn’t raided SPR.

    Today will make the umteenth week EIA’s crude inventories are counting shale ‘oil’ as 100% oil.
    In fact, W/O Venezuelan imports there’s no longer as much actual need for condensate rich shale
    product. (Liquid gas mixed with heavy VZ crude to produce diesel, jet fuels)

    Currently Russia (further away than Venezuela) is currently providing some heavy crude.
    Canada, closer than Russia, is also exporting
    crude to US though pipeline capacity is limited.

    Oh, 90% of shale only oil companies lost money in
    2018. With crude above $60 at least 15% of existing shale only outfits may survive coming shortages of heavy crude.
    With all Trump’s Russian money Trump buys Alberta.

  9. Robert Inget on Thu, 30th May 2019 8:31 am 

    For astute readers only.
    Speaking of Russia, that main pipeline to Eastern Europe will be ‘clean’ in six to nine months.

    EIA results and comment posted here @ 11:00 Eastern (holiday hours)

  10. Robert Inget on Thu, 30th May 2019 10:03 am 

    Not as bullish as expected

    Summary of Weekly Petroleum Data for the week ending May 24, 2019

    U.S. crude oil refinery inputs averaged 16.8 million barrels per day during the week
    ending May 24, 2019, which was 189,000 barrels per day more than the previous week’s
    average. Refineries operated at 91.2% of their operable capacity last week. Gasoline
    production decreased last week, averaging 9.9 million barrels per day. Distillate fuel
    production decreased last week, averaging 5.2 million barrels per day.

    U.S. crude oil imports averaged 6.9 million barrels per day last week, down by 81,000
    barrels per day from the previous week. Over the past four weeks, crude oil imports
    averaged about 7.0 million barrels per day, 8.5% less than the same four-week period last
    year. Total motor gasoline imports (including both finished gasoline and gasoline
    blending components) last week averaged 1,087,000 barrels per day, and distillate fuel
    imports averaged 177,000 barrels per day.
    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
    Reserve) decreased by 0.3 million barrels from the previous week. At 476.5 million
    barrels, U.S. crude oil inventories are about 5% above the five year average for this time
    of year. Total motor gasoline inventories increased by 2.2 million barrels last week and
    are about 1% above the five year average for this time of year. Finished gasoline
    inventories decreased while blending components inventories increased last week.

    Distillate fuel inventories decreased by 1.6 million barrels last week and are about 5%
    below the five year average for this time of year. Propane/propylene inventories
    decreased by 0.1 million barrels last week and are about 17% above the five year average
    for this time of year. Total commercial petroleum inventories decreased last week by 1.6
    million barrels last week.

    Total products supplied over the last four-week period averaged 20.3 million barrels per
    day, down by 2.0% from the same period last year. Over the past four weeks, motor
    gasoline product supplied averaged 9.5 million barrels per day, down by 2.2% from the
    same period last year. Distillate fuel product supplied averaged 4.0 million barrels per
    day over the past four weeks, down by 2.6% from the same period last year. Jet fuel
    product supplied was up 2.9% compared with the same four-week period last year.

  11. Robert Inget on Thu, 30th May 2019 10:26 am 

    Return to FiftyEight Bucks a Barrel.

    I’m being told so called ‘adjustments’ of about six million barrels per week (18 million barrels) are being added to boost inventories.

    I’m really sick about this turn of events.

    EIA Report transparency was once the envy of the world. Now, evidently the report has been
    Politicized in an effort to hold gasoline prices in check.
    As with all such tinkering, someone or someones
    working at EIA will spill the beans.

    If you must know, it’s the disparity between what
    we know to be true and what is laid out as factual.

    Politics aside. ‘Come-Uppings’ when or if they come will be damning.
    Instead of a gradual incline in gasoline prices
    the reverse could devastate, even crash markets.

    EIA has always been one agency devoid of political influence.

  12. Robert Inget on Thu, 30th May 2019 10:35 am 

    OK, so called ‘adjustments’ (six million barrels)
    may or may not be fictional.
    This six million barrel adjustment come from the nation of.. wait for it.. “Unknown”.
    (more oil than OPEC shipped last week)

    Here’s a spread sheet showing in some detail.

  13. Sissyfuss on Thu, 30th May 2019 10:40 am 

    Robt, if the Supreme Court is supremely political then the filtering down of partisanship is unavoidable.

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