One trader speaking to a Platts reporter had this to say about the decision by the Department of Energy today to sell 5 million barrels of oil from the Strategic Petroleum Reserve.
“The Gulf Coast market has plenty of barrels,” he said. “They should have done it a few weeks ago when the Gulf Coast was tight due to all the weather delays.”
A few weeks ago, however, Arseniy P. Yatsenyuk wasn’t in Washington. He’s the interim President of Ukraine, and he’s in DC today.
It almost defies logic to think there isn’t a link. (And White House press secretary Jay Carney said there isn’t one, when asked about it at the daily White House press briefing.)
But there is no reason to sell oil now. The reason given by the Department of Energy — a test sale to evaluate its ability to distribute oil in the event of an emergency — sounds very formal and entirely believable. But such a test hasn’t been done since 1990. Why now?
The “energy weapon” that has been discussed so vehemently since the Ukraine crisis began — using US LNG and crude oil exports to weaken world prices and steal Russia’s energy customers — always had a few flaws in it. First of all, even for the terminals where LNG exports have been approved, they aren’t ready to go. Second, US crude exports are still banned, despite lots of talk of changing that.
But selling oil out of the SPR, and specifying that it’s sour crude that’s for sale — the same type as Urals, Russia’s crude grade — can be done now. Next month, in fact, 5 million barrels of oil over 30 days, for an average of just over 165,000 b/d.
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Selling oil out of the SPR has been advocated multiple times by energy economist Philip Verleger, both pre- and post-Ukraine crisis. “In 2014, we could sell 140 million barrels from the SPR without affecting US energy security. Another 40 or 50 million barrels can probably be sold in 2015,” he recently wrote. “These amounts are not required to meet our International Energy Program commitment of holding reserves equal to 90 days of imports. Indeed, we could sell 500,000 barrels per day for up to two years without breaching this obligation.”
He makes another point, which has been heard frequently from others: “The SPR oil is not only surplus, it is useless. Refiners have responded to increases in US and Canadian oil production by altering pipeline distribution systems. This makes most of the SPR crude unusable in a crisis. The oil sits in facilities in Louisiana and Texas with no place to go. It can be loaded on ships, but it cannot be moved to Midwest refineries during a disruption, as the planners envisioned.”
There are several key numbers behind this decision. First of all, US net imports were down to 5.05 million barrels in December, the latest month for which figures are available. Second, the total SPR of a little under 700 million barrels covers, according to the latest EIA monthly report, 138 days of net imports (a figure that includes Canadian imports, which are all but locked into going to the US). Just three years ago, net imports were 3.4 million b/d higher than that, and the SPR covered 85 days of them.
The International Energy Agency, which mandates that member countries have 90 days’ worth of oil on hand, said it was fine with the US move. “As US oil stocks currently total more than 200 days’ worth of net imports, the United States can proceed with the sale of 5 million barrels from the Strategic Petroleum Reserve and remain in full compliance with the IEA stockholding obligation,” it said. The figure for 200 days is total inventories, commercial and strategic. The 138 days quoted by EIA is just the SPR. (Ed. note: this is modified from an earlier post in which it was stated that it was unclear where the 200 days’ figure came from.)
Finally, if the plan is to punish Russia by lowering oil prices, it worked for today at least…slightly. Brent, the benchmark for Urals prices, was down only 53 cts, to $108.02. WTI was down further, to $97.99, down $2.04. (One could argue today’s move hit Harold Hamm more than Vladmir Putin.)
Sour crudes relative to benchmarks were down further. Mars was at WTI plus 50 cts; Friday, it was plus 95 cts. But there was no impact today in the market for Urals; CIF Rotterdam Urals cargoes were assessed by Platts Wednesday at Dated Brent minus $0.40/b. But that trade was largely completed before the DOE sprung its announcement on the market.