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Trump Fuels SPR Oil Sale Speculation

SPR releases are a short-term solution but they do buy some time for OPEC countries to bring additional spare-capacity on line.

US President Donald Trump said Wednesday he expects full compliance when sanctions on Iran's oil customers go back into force on November 5, while administration officials indicated they are working to dull the impact on the global oil market.

"Any individual or entity who fails to comply with these sanctions will face severe consequences," Trump said Wednesday.

But on Tuesday, a key State Department official indicated that the administration was concerned about the impact of sanctions on oil prices and was working to address it.

"We will ensure prior to the re-imposition of our sanctions that we have a well-supplied oil market," Brian Hook, head of the State Department's Iran action group, said Tuesday.

S&P Global Platts Analytics expects 1.7 million b/d of Iranian crude and condensate to leave the market by November, compared with April levels of 2.91 million b/d. It upped the outage estimate from 1.4 million b/d.

Trump's stance on Iranian sanctions -- coupled with his UN comments Tuesday that OPEC was "ripping off" the world and a general worry that higher gasoline prices could hurt Republicans in November's midterm elections -- has fueled speculation among analysts that the administration may consider a release from the Strategic Petroleum Reserve.

An SPR release could boost US oil exports, provide support for markets impacted by the re-imposed Iran sanctions, and could lower prices, albeit only in the near term, analysts with Petromatrix said in a note Wednesday.

"SPR releases are a short-term solution but they do buy some time for OPEC countries to bring additional spare-capacity on line ... and if they allow a greater global market penetration for US producers then they could become a political success for the US President," Petromatrix wrote.

Administration sources said this week that the White House was not actively considering a release. They said that while it was possible, such a release would be unprecedented.

It would likely draw scrutiny from Congress since it would seemingly go against the goal of the domestic reserve, which is to protect US economic interests and US companies from price spikes or global supply disruptions, sources said. A release in response to a price spike after Iran sanctions take effect would supply non-US companies with a US government asset in order to protect them, at least partly, from a US policy change.

"This has not been done before and is not a defined purpose of the SPR," one administration source told S&P Global Platts. "That said, there is a first time for everything."

Federal law allows a president to release up to 30 million barrels from the SPR. In 2011, President Barack Obama authorized 30 million barrels to be sold from the SPR, but that was part of a coordinated, 60 million-barrel response with International Energy Agency partners to counter supply disruptions in Libya and other countries.

Trump's possible release of SPR crude could involve the IEA, sources said.

In 2000, President Bill Clinton authorized a 30 million-barrel exchange from the SPR to address concerns of low distillate levels in the US Northeast. President George W. Bush, who was a candidate for president at the time Clinton authorized that exchange, claimed it was politically motivated, an attempt to lower gasoline prices ahead of that year's election.

The SPR is the world's largest stock of emergency crude and currently holds 660 million barrels of crude, stored in underground salt caverns in four sites along the Gulf of Mexico. The reserve, which was set up in response to the Arab oil embargo of 1973, has an maximum design drawdown rate of about 4.4 million b/d. It would take 13 days from a presidential decision for SPR oil to enter the US market, according to the Department of Energy.

The DOE recently sold 11 million barrels of sour crude from the SPR for loading over October and November, which may cushion some market impact from the Iran sanctions. The sale is one of roughly 300 million barrels worth of sales that Congress has mandated through fiscal 2027. It is possible that the White House could move up the dates of one or more of these sales since they have already been approved by Congress, sources said.

Iranian oil customers have already been adjusting their purchases months ahead of the expected US re-imposition of sanctions, according to S&P Global Platts Analytics.

Data from cFlow, Platts trade-flow software, shows that Iranian crude and condensate exports fell to 1.9 million b/d in August, down 400,000 b/d from July.

"Iranian export losses have already accelerated faster than we expected," said Paul Sheldon, Platts Analytics' chief geopolitical adviser. "The Trump administration has yet to lower its demand for ... countries to cease importing Iranian oil altogether by November 5, and indications from Europe and Asia show that companies have little appetite to risk exclusion from the US market and financial system."

Platts Analytics expects crude and condensate exports to fall to 1.1 million b/d by October loadings, about 300,000 b/d below last month's forecast. Platts Analytics forecasts Iranian crude and condensate exports to fall to 800,000 b/d by Q4 2019.

The Trump administration is also dismissing an announcement by EU leaders this week to create a payment mechanism that would sidestep US sanctions and allow companies to continue to do business with Iran, including buying its oil exports. State's Hook said private companies will still comply with the sanctions because the risks of being shut out of the US financial system are too great.

"All the major corporations have made their decisions to leave the Iranian market," Hook said. "It's all out there in the public. You can see all the European companies that have made their decision. And they're doing it because they're making their decisions based on business."

Hook added: "Companies have a choice either to do business in Iran or in the United States. Very few companies are going to choose Iran over the United States, and so that's just the economic reality."


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