twitter

Tuesday, June 6, 2017

Trumps plan to sell off some of the US oil reserves roils oil markets

(May 24)The Trump plan to sell off half of the US strategic oil reserve was a surprise move and goes counter to OPEC's attempts to limit supply and boost prices.

The recently released Trump budget plan would see half of the US Strategic Petroleum Reserve (SPR) sold off over ten years, starting in October 2018.
The U.S. SPR contains about 688 million barrels, the world's largest reserve. The sale would bring in $16.5 billion. The release would be about 95,000 barrels a day or one percent of U.S. current output. Ironically the news comes just after Trump visited Saudi Arabia, which is attempting to persuade OPEC and other countries to reduce production to raise prices.
U.S. production has surged by almost half in five years and so it could be argued Trump's move makes good sense at least from an America First perspective, although no doubt U.S. producers would also like to see higher oil prices as well.
Following the announcement Anas Alhajji an independent oil analyst said of the move: "It will complicate the OPEC efforts to stabilize the market." It is possible that Congress may not accept the proposal but even the suggestion was sufficient to result in slightly lower oil prices for WTI crude. However overall stocks rose as the earlier Trump Slump has now been overcome: "U.S. stocks climbed to fresh records, while the dollar slipped with Treasury yields as minutes from the Federal Reserve’s last meeting showed officials unperturbed by recent signs of economic weakness. Crude slipped."
After the oil shock in the 1970's the U.S. began building SPR sites that would hold 90 days worth of a country's estimated daily demand. The U.S. released supplies at the start of the Gulf War in 1991 and after Hurricane Katrina disrupted supplies from the Gulf. It also released supplies in 2011 amid concerns about Libyan supplies. However, last December the Congress approved the sale of $2 billion from the SP to pay for maintenance and repairs to storage facilities. The U.S. Department of Energy sold 6.4 million barrels in January and another 10 million this February.
The White House proposal would also open the Alaskan arctic region to oil exploration. U.S. production could go from the present 9.3 million bpd to 10 million. This would bring the U.S. close the Saudi Arabia and Russia as the world's largest oil producer. The recent increase in U.S. security of supply is from the growth in shale production in the U.S. Virendra Chauhan, an oil analyst says: ."The U.S. has likely become more sanguine when it comes to having a very large SPR holding, given lofty medium term forecasts for the Permian basin." The Permian Basin is a large shale field in the U.S.
OPEC is likely to be able to extend production cuts for another nine months as the group meets this week to discuss how to combat a global surplus of crude. Saudi Arabia favors the extension as compared to the originally planned six months. It wants to prevent the price of oil sliding down to less than $50 dollars a barrel. Iraq agreed to a nine month extension. The deal was reached in December in which OPEC and 11 non-members including Russia agreed to cut output by 1.8 million bpd during the first half of 2017. However, the boost in price has increased U.S. production and now the U.S. is making things worse by its plan to put half of its reserves on the market.
Canada has actually helped OPEC reach its goal:Canada, as one of the world’s largest non-OPEC oil and gas producers, has held back more output than any individual OPEC member in the latest round of cuts since well before the current pact was in place. Based on nearly a dozen estimates collected from top energy investors, industry experts and academics, BNN has determined Canadian oil production would be far higher today were it not for a constant lack of pipeline export capacity over the first half of the past decade.The lower production is for the most part due to the lack of more pipelines needed to increase exports. However, it also means that Canada is getting a better price than it would if there were an even larger glut on the oil market.


No comments: