Saturday, July 14, 2018

U.S. and Allies Consider Possible Oil-Reserve Release



Discussions are part of a broader effort to ensure oil markets remain well supplied amid a host of production disruptions around the world




A Chevron deepwater oil platform in the Gulf of Mexico off the coast of Louisiana. The Trump administration is debating whether to dip into the country’s emergency oil stocks, according to people familiar with the matter. Photo: Luke Sharrett/Bloomberg News

By
Benoit Faucon and
Timothy Puko Updated July 13, 2018 4:13 p.m. ET
 


U.S. and Western officials are considering an eventual emergency release of stockpiled oil if new supplies can’t prevent another sharp rise in prices, according to people familiar with the matter.

The Trump administration is actively assessing whether to dip into the country’s emergency oil stocks while it simultaneously pushes other countries to boost their output, according to people familiar with the matter. The discussions are part of a broader effort to ensure oil markets remain well supplied amid a host of production disruptions around the world, and rising global demand.


Any draw down of the so-called Strategic Petroleum Reserve isn’t imminent, according to people familiar with the matter.

Such releases have been rare, and typically only as a last resort. The current discussions about such a move—while preliminary—-underscore growing worry among consuming nations over supplies. OPEC and Russia have committed to pumping more crude to ease markets, but a host of global production constraints—and rising demand—have raised questions about whether that new oil will be enough.

Some senior Trump advisers are strongly opposed to the idea, and the administration is primarily concerned with keeping its options open, according to people familiar with the matter.

Meanwhile, Fatih Birol, director of the International Energy Agency, a group that advises industrialized nations on energy policy and coordinates emergency oil releases globally, told a private dinner last month that a release was an option if supply outages worsen, according to people at the dinner.


Global CushionEmergency oil stocks held around the world.Source: International Energy AgencyNotes: Government-held crude stocks in the OECD; 2018 figures as of May
.billion barrelsEuropeAsia/OceaniaU.S.2010’11’12’13’14’15’16’17’180.00.20.40.60.81.01.21.4

An IEA spokesman declined to comment on the dinner, but said “we stand ready to act if necessary to ensure markets remain well supplied.”

A few months back, a release of strategic oil reserves sounded far-fetched. In the past, such a move has been a last-ditch option, often triggered by war. There have been just three IEA-coordinated releases—the most recent was in 2011 at the height of the Arab Spring.

A number of big, recent supply disruptions, however, have combined with rising oil demand to send prices marching to a series of 3 ½ year highs. A collapsing economy in Venezuela has cut production there. U.S. sanctions against Iran threaten to bottle up that country’s exports.

Until this past week, rebels had forced the closure of Libya’s oil export terminals. Underscoring the tightness in markets, when Libya’s national oil company said Wednesday that those facilities would soon reopen, oil prices tumbled in relief.

Late Friday, international crude prices were trading down 3% for the week. But they’re still up 11% from the start of the year.

Saudi Arabia, fellow members of the Organization of the Petroleum Exporting Countries and Russia have all vowed to ramp up output to make up for any shortfall. Oil market watchers, though, are skeptical they have the capacity to fully compensate for all those missing barrels, and keep up with rising demand.

In its monthly oil market report, the IEA warned Thursday that Saudi Arabia’s higher output was reducing its spare capacity—production it can quickly turn on in an emergency. That could make the world vulnerable to the next, unexpected outage, it said. Saudi Arabia’s higher output “comes at the expense of the world’s spare capacity cushion, which might be stretched to the limit.”

Members of the IEA agree to hold 90 days of oil stocks for emergencies. The Paris-based agency coordinates the logistics of a release, though individual countries have the final say in whether they participate or not. They can also act unilaterally, as the U.S. did last year when it released about 5 million barrels in the wake of refinery outages during Hurricane Harvey.

In the U.S., higher oil prices come at a politically sensitive moment—just ahead of midterm congressional elections. Mr. Trump’s fellow Republicans are trying to retain control of both chambers. Gas prices—which rise with oil—have historically been a hot-button issue for American voters.

In recent months, Mr. Trump has blamed OPEC for the higher prices, cajoling the cartel on Twitter and demanding it to boost output. He has also publicly pressed Saudi Arabia to raise production.

“Few things terrify an American president like rising pump prices. Period. End of story,” said Bob McNally, a former energy adviser to then-President George W. Bush and now a private consultant.

Energy Secretary Rick Perry said the SPR was for emergencies, not for easing gas prices. “It’s there for an emergency type of response, not as a market manipulator,” he told reporters last month.

According to people familiar with the debate inside the Trump administration, any major release from the U.S. would be contingent on a further, steep rise in oil prices from today’s levels—more than 10%. A release would also only come if it became apparent that Saudi Arabia, Russia and other big producers were falling short of replacing lost production in Venezuela and Iran, they said.

The administration has also discussed a limited, test release—a small-scale draw down to ensure the system is ready for a larger one, if that is necessary, according to several people familiar with the matter. Such a release may not add a significant amount of crude to world markets, but would send a powerful signal that the U.S. is ready to act if it needs to, according to this thinking.

The U.S. SPR consists of about 660 million barrels of crude, mostly stored in empty salt caverns in the southern U.S. It was created in the wake of the Arab oil embargo of 1973-74 as a guard against disruptions to imported oil.

Amid rising U.S. oil output, a debate has raged about whether it’s as important now as it once was. Congressional studies have in recent years also raised questions about the state of infrastructure that supports the reserve. A boom in shale oil production has forced pipeline operators to reverse the direction of flow of some key routes–which would make it more difficult to pipe any release quickly to U.S. refiners that might need it.

Write to Benoit Faucon at benoit.faucon@wsj.com and Timothy Puko at tim.puko@wsj.com

Appeared in the July 14, 2018, print edition as 'U.S., Allies Consider Release of Oil Reserve.'

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