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Page added on March 13, 2014
SPR oil put up for sale on the day Ukraine’s new chief is in town
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.
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.
18 Comments on "SPR oil put up for sale on the day Ukraine’s new chief is in town"
ghung on Thu, 13th Mar 2014 2:26 pm
Seems someone is redefining “strategic” in strategic petroleum reserve. At least the price of oil has dropped a bit,, for now.
Davy, Hermann, MO on Thu, 13th Mar 2014 2:28 pm
Alright Arthur, please rip into the idiotic PTB in Washington. We deserve it this time! I can’t stand to hear moves like this. Totally ineffectual and impotent. It just makes the US leadership on this Ukraine situation look like they put their shirt inside out and shoes on backwards like my kids do sometimes. It looks funny on kids but not with national leadership.
ghung on Thu, 13th Mar 2014 2:51 pm
Yeah, Davy, once again the US leadership insists on showing the world its buttcrack.
foxv on Thu, 13th Mar 2014 3:00 pm
5 million barrels equals 6 hours of US consumption.
This is much ado about nothing. Big conspiracy theories about timing and purpose are a waste of time.
Why didn’t they sell it when the market could actually use it? It’s the government, they are always late to the game.
As for the excuse that it’s a test sale, why not? The author already admits there are serious distribution problems. Maybe the holders of the SPR notice this as well.
rockman on Thu, 13th Mar 2014 3:26 pm
A little reality check regarding the US bitch slapping the Russians by “flooding” the market with US SPR oil. Let’s assume the US “dumps” that 5 million bbls of oil into the market place in April. So in addition to the 2.7 TRILLION BBLS of produced that month the US would “flood” the market with an additional O.19% of supply. Wow…that will certainly crush Russia’s oil income expectations. BTW US law requires that SPR oil NOT be sold at a discount. It has to be sold at a price determined by recent sales averages. I haven’t seen the details but in reality typically the oil isn’t “sold” to refiners but “loaned” to them with the obligation to be replaced in kind.
“The Energy Department said the test sale had been planned for months, timed to meet demand from refiners coming out of annual maintenance cycles. But oil traders noted that Russia’s effort to take over the Crimea region from Ukraine has prompted calls for use of booming U.S. energy resources to relieve dependence on Russian natural gas by Europe and Ukraine.”
“…booming energy resources”? Oh…they must be referring to the 200+ million bbls of oil the US will IMPORT during April. Sounds more like a fizzle then a boom IMHO.
Who says Washington is not capable of putting style above substance? LOL. So the thought is that by releasing SPR oil it would “relieve dependence on Russian natural gas by Europe and Ukraine.” Hmm…produce oil to relieve NG demand? And then: “…planned for months, timed to meet demand from refiners”. So the 5 millions bbls was planned to meet increased demand so at best it might keep the market price flat. Dang: so we threaten the Russian’s that we are taking actions that might keep the price of their oil stable. That will certainly bring those dang commies to their knees. LOL.
Northwest Resident on Thu, 13th Mar 2014 3:54 pm
Who really knows why the U.S. government did this release from the Strategic Petroleum Reserve? We certainly can’t take the official government word on why they did it as the truth — although I’m sure many people do. We can guess and speculate as to why they did it, and make judgments of “good, bad, stupid, etc…” based on our guesses and speculations. Since the actual release had very minimal impact on anything — except for the huge news headlines and rampant speculation in conspiracy land — I figure there is a very good chance that the release was done for pure PR purposes, to make a statement of some kind, and we don’t know if that “statement” was targeted at the Russians, the Europeans, or maybe at our own national audience. With the big three ring media circus we have in America every day, nonstop, it is very difficult to ascertain what is real and what is not real these days. Somebody somewhere thought it would be a bright idea to release this oil from the strategic reserve — we’ll probably never know the actual reasoning behind that bright idea.
bobinget on Thu, 13th Mar 2014 4:07 pm
foxv Gets directly to bottom line. Six to eight hours consumption if released in one day… impossible
it seems. I’ve been wondering why the SPR was not refilled after the last draw in 2012. Now we know.
In the past when refiners needed SPR crude it was always an exchange or swap for later delivery, not cash.
Usually when a Democratic Administration does a SPR non weather related disaster draw, the Right swings into action damning the President for using SPR to keep gasoline prices down before an election. This move caught them off guard with nothing much to say.
FOX & friends have plenty to say about what a pussy Obama is and how they all admire Putin for his aggressive, decisive behavior. This is the first time
I can recall when the American Right seems to favor
ExCommunist KGB operatives over our President.
Foreign policy at one time was a bipartisan affair,
no more.
Obviously, if anything is finite in this oil dominated world it’s our SPR. Made more so by not hooking it up
directly to refineries… or, is that really an oversight?
The point being, can they move 500,000 B p/d to
working refineries? Most Gulf refineries are subject to
flooding when, not if, we get another massive tidal surge hurricane. When the official ‘party’ line is ‘Global Warming is a Hoax’ there is no point in expensive building for ten meter flooding.
We burned 18.7 million barrels every day last week or
nearly 131 Million Barrels for the week. In two months
we will be using at least five to six million barrels
additional weekly. Now, how does an extra 165 M B look to you percentage wise?
Its not all about Putin. Nigeria, Venezuela, are both on the verge of some serious infighting which is bound to curtail exports. Gabon which was supposed to deliver
billions of barrels to America, is experiencing serious
production failures, (depletion) . Expectations were so high Gabon went out and spent money it may not ever see.
The Mideast situation grows more tiresome as
Syria becomes the new Afghanistan. Tens of thousands of unemployed idealistic young Islamic fighters are being drawn into a Saudi and Iranian power struggle death trap.
Yup, 500,000 SPR B p/d will certainly bring democracy
to the world, stamp out corruption, feed an out of control population, manage water and climate change
and make Christians, Muslims love themselves and one another.
Nony on Thu, 13th Mar 2014 4:14 pm
I agree that this action is tiny, ineffectual and the market will judge it so. It’s better than nothing (at least it shows some concern), but it shows a lack of brains and a tendency for style over substance by our leadership.
Now if instead, we:
*Approved Keystone
*Opened the entire Continental Shelf for drilling
*Opened Anwar
*Removed any sanctions on Iran
*Let the Libyan rebels ship oil
*Let the Kurds ship oil
*Greenlighted all pending LNG export plans
*Allowed free export of crude from the US
…that would turn heads.
bobinget on Thu, 13th Mar 2014 4:39 pm
NWR, rockman, What do ya think SPR release will be construed as a ‘tell’ ? A dead giveaway we are scared.
If govt. really wanted to do something they should mandate more natural gas consumption. Prohibit use of dirty waste oil for heating by a date certain.
This year the US produced an overabundance of gas.
One point eight Trillion cubic feet MORE production y/y than last year. Gas bags need $5.50 to make enough profit to keep drilling. Consumption is falling despite cold weather. This is where govt. could make difference. Drilling has been too rewarding. Many wells have yet to be ‘hooked up’.
http://www.naturalgasintel.com/articles/97568-backlogged-wells-in-pennsylvania-likely-to-push-production-higher-this-year
Northwest Resident on Thu, 13th Mar 2014 4:53 pm
bobinget — Most excellent rant on your prior post, I wanted to say. But your question “will SPR release be construed as a ‘tell'”, I honestly have no idea. The only thing that seems really clear to me right now is that the world economy is in the process of grinding to a screeching halt right now. We can hear the sound, we can smell the burning rubber and we can see that high-octane hotrod swerving down the road with the brakes locked. Things are going insane — this strategic reserve release just adds another caboose to the Crazy Train. Nothing makes sense anymore, unless we frame it all in the peak oil/collapse imminent picture frame — and what a chaotic picture it is.
rockman and shortonoil would be the best ones to comment on the NG situation. From what I know, NG prices will NEVER be stable until/unless the government steps in and provides some continuity and guarantees. NG business has always been boom/bust, over and over. I do know that there isn’t a chance in hell that NG is going to save America from chaos once the oil shortages start hitting. Our chance to build out that infrastructure and put government policies in place has long since passed, along with most if not all opportunities to mitigate the worst results from our coming energy shortages. Too little too late = doom and gloom. If you aren’t feeling it, then you probably have no idea what is going on (in my opinion).
rockman on Thu, 13th Mar 2014 5:45 pm
Folks – Very simple this SPR release is a non-event we wouldn’t even be chatting about if the MSM didn’t want to reinvent it as a Ukrainian side bar.
They even ignore the official White House official story:
White House press secretary Jay Carney said Wednesday that the drawdown was done specifically for operational purposes, and wasn’t related to Ukraine. What operational purposes? Again from the WH: “Due to the recent dramatic increase in domestic crude oil production, significant changes in the system have occurred—including pipeline expansion, construction of new infrastructure, reversed flow of existing pipelines and increased use of domestic crude oil terminals,” said DOE spokesman Bill Gibbons. “In order to appropriately assess the system’s capabilities in the event of a disruption, today the Department of Energy authorized a test drawdown and sale of up to 5 million barrels of sour crude oil.” In fact it had been planned for months since they had to have the various refineries bid for whatever share of the 5 million bbls they would take.
Again from the WH: “The release was designed to have minimal market impact. The release has been under discussion within the administration for months. It said the oil is being released Wednesday so refineries interested in buying crude oil from the reserve could do so as they prepare for the summer driving season and switch over to summer grade gasoline, which is more expensive than the kind used in winter.”
And yes: the SPR is for all practical purposes connected directly to refineries via barge transfer and pipelines. That’s why the SPR storage caverns are located on the Texas and La. coast and not in Montana. LOL. Despite the crap the MSM has put out I can promise you that this release has had no effect on the price of oil. Maybe some folks have changed their bets in the futures market. But I’m selling my oil for the same price I would have been getting whether they did the release or not.
Northwest Resident on Thu, 13th Mar 2014 6:43 pm
The MSM and all their affiliates never pass up an opportunity to hype the possibility of war, and to generate endless speculation on what will lead us to war. The reason is simple: They need to sell newspapers, television advertising time and website click-throughs. This release is a prime example of just how far the MSM will go to hype a total non-issue into something that it most definitely is not. Lies and false premises are just tools of the trade for MSM these days.
rockman on Thu, 13th Mar 2014 8:51 pm
And one more ass IMHO that’s trying to connect a completely unrelated subject to the Ukraine and Putin:
WASHINGTON (AP) — President Barack Obama’s former national security adviser says he should approve the Keystone XL oil pipeline as a matter of national security. Retired Gen. James Jones tells the Senate Foreign Relations that approving the pipeline would send a message to Russian President Vladimir Putin and other “international bullies” that they cannot use energy security as a weapon. Jones says rejection of the Canada-to-Texas pipeline would “make Mr. Putin’s day and strengthen his hand.”
Nony on Thu, 13th Mar 2014 9:24 pm
I think it connects. You have to think long term. We can’t really affect the situation on the ground in Ukraine, right now. But we can try to foster a lower world price of oil/gas. Which (in addition to putting Rockman back on the groceries hauling instead of the disco dollars, in addition to benefitting consumers, in addition to funding less Islamists) has the effect of reducing Putin’s $$$ of hard currency.
shortonoil on Thu, 13th Mar 2014 9:35 pm
“Despite the crap the MSM has put out I can promise you that this release has had no effect on the price of oil.”
That’s not quit right Rock, we were watching this pretty closely to see just what the impact would be. Just prior to the official statement of release (as usual there are no secrets in Washington) the price fell about $3.00/barrel at Cushing. Of course, it regained about 75% of that in less than two hours. Who was playing this we don’t know, but I always look to something fishy on Wall St. anytime someone is front running the market. Can you spell Goldman Sachs? China’s PMI data came out the next day and clobbered the price again. Crude just can’t get a break lately.
“Jones says rejection of the Canada-to-Texas pipeline would “make Mr. Putin’s day and strengthen his hand.”
I bet the lobbyist are all over this like flies on fresh dog doo. Next, if Obama does not approve the Keystone, Putin is going to mutate into “WONDER WOMAN”, OMG.
It makes one wonder which of the Three Stooges is setting policy in Washington!!
http://www.wunderground.com/
Northwest Resident on Thu, 13th Mar 2014 10:11 pm
“It makes one wonder which of the Three Stooges is setting policy in Washington!!”
It’s gotta be Moe. No doubt about it. He’s the one twisting ears, pulling on noses and hitting everybody on the head with a hammer to get things done. Now, suddenly, it all makes sense…
rockman on Fri, 14th Mar 2014 1:42 am
Folks need to get a grasp of the magnitude (or lack thereof) of the SPF. First the entire volume of the SPR represents less than 8 days of global production. Try another metric: if 100% of the SPR were produced in the next 12 months how much would it add to global oil production? A tad less than 2.2%. Are y’all starting to grab the absolute insignificance of the SPR with respect to global oil consumption. Now let’s see how it’s relevant to just US production: the entire volume of the SPR represents 10% of US oil consumption for 12 months.
But guess what? Those metrics I just offered are bullshit. Have some fun for a few hours and go read the policies for SPR release governed by CONGRESSIONAL LAW. First, withdrawal is limited to 1 million bopd for a very limited time. By CONGRESSIONAL LAW (which can only be changed by congressional action and not executive order) the SPR can only supply about 1% of global production. The Chinese can have a greater effect on global oil prices then the US SPR release.
Now dig for a few hours thru the law and y’all will find the vast majority of the SPR is dedicated for the sole use of the Dept. of Defense by CONGRESSIONAL LAW. They make it a tad difficult to figure it out. The same CONGRESSIONAL LAW also specifically states it’s illegal to use the SPR to effect the market value of oil. Which is why the CONGRESSIONAL LAW mandates that any SPR oil be sold at a price representative of the previous 30 days. Which is why the last oil released from the SPR was sold to the refineries for a tad more than the spot price for oil when the release hit the market place. Remember back to when oil prices bumped over $145/bbl. And exactly how much oil was released from the SPR to knock those prices down? Exactly ZERO BBLS.
And think for a moment: so the price of oil dropped for 2 hours. The folks making oil futures bets changed their wagers. Me and everyone I know sells our oil on a monthly contract basis. Oil could jump or drop a few $’s per bbl for a few days and it won’t change what we get. The 90 million bbls of oil that were moving from wherever it was stored to whatever user that bought it didn’t change in price.
And none of this to say there won’t be some knee jerk reactions in the futures market. But in the real world where real physical oil is actually bought and sold it don’t mean sh*t. LOL.
BTW did I mention that the same CONGRESSIONAL LAW also requires that any SPR withdrawal has to be replaced in a rather short period of time which, at the moment, I don’t recall.
Folks who think the SPR can be used by the gov’t to effect the price of oil in this country or have any meaningful effect on any other country’s energy situation is very mistaken IMHO. The best the SPR might accomplish is to relieve very short supply problems IN THE UNITED STATES. And past releases during emergencies proved it’s even somewhat limited in that regard.
rockman on Fri, 14th Mar 2014 12:28 pm
And a reminder that SPR withdrawal in response to an international incident was done recently. And again go search the govt posted regs on the SPR. Trust me: is a very difficult and painful effort. You might think as important as some politicians consider the SPR it might be easier to understand the regs but it isn’t. Mucho technocrap and legalese. From: http://www.usnews.com/opinion/blogs/on-energy/2012/06/29/house-draws-prudent-line-in-sand-in-petroleum-reserve-debate
“Recent Strategic Petroleum Reserve activity seemed to serve a legitimate purpose—some 31 million barrels were drawn out of the reserve in the fall of 2011 as part of the United States’ contribution toward stabilizing international oil supplies amid unrest in Libya. But even in this case, some industry observers claimed that politics were at work. The trouble is, the Strategic Petroleum Reserve can often serve as a tempting target for presidents and Congresses desperate to appear as if they’re “acting decisively” to address oil price spikes. In April, Human Events reported that “some Congressional Democrats and at least one former administration official have been floating the idea that the President should release oil from the U.S. Strategic Petroleum Reserve as a way to lower prices.”
Here’s more trouble. Although the Department of Energy is supposed to repurchase oil for the reserve “without incurring excessive cost or appreciably affecting the market price of petroleum products to consumers,” such operations can be difficult to time and balance, creating fiscal consequences. President Barack Obama—who once criticized George W. Bush’s post-Hurricane Katrina Strategic Petroleum Reserve drawdown for “tapping the reserve to provide a small, short-term decrease in gas prices”—has yet to replace the oil reserves that were released during the Libyan turmoil, possibly out of concerns for the federal balance sheet. In previous times, Strategic Petroleum Reserve oil has been sold to reduce the deficit.”
IOW the govt is currently required, by CONGRESSIONAL LAW, to put about $3 BILLION of oil back into the SPR to make up for the Libyan withdrawal. But I guess it’s easier for both the R’s and D’s to ignore the law given the current budget battles.