Trump's Bid to Sell U.S. Reserve Oil Could Undermine OPEC Cuts

EghtesadOnline: 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 and undermining OPEC’s efforts to prop up prices.

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24 May 2017

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. 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, Bloomberg reported.

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 various government programs. The Trump proposal would draw down the reserve even more. Sales could start as soon as this October, boosting year-end crude 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.”

Recent sales of U.S. government oil 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.

Largest Reserve

The Strategic Petroleum Reserve, established in the wake of the Arab oil embargo of the 1970s, is the world’s largest supply of emergency crude oil. It contains 687.7 million barrels of oil in salt caverns and tanks at designated locations in Texas and Louisiana, which allow for quick distribution when natural disasters or unplanned incidents occur. The White House budget proposal would shrink the stockpile to less than 260 million barrels.

Unlike other aspects of the president’s budget proposal, Trump’s plan to drain the oil reserve may gain legs in Congress, which has voted three times in the past two years to sell off crude from the stockpile, earmarking 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 oil 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 gasoline stockpile created in 2012 after Hurricane Sandy left some New York gasoline stations without fuel. The White House proposes to dispense with the gasoline stash in fiscal 2018, and sell its entire 1 million-barrel inventory during the same period.

Long term, reducing the amount of oil in the 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.”