Here's an excerpt from an institutional research note written by Hedgeye Potomac Senior Energy Policy analyst Joe McMonigle. If you're an institutional investor email sales@hedgeye.com to read this entire research note.
Proposal to cut Strategic Petroleum Reserves in half is more about raising revenue than rising domestic production
President Trump’s first budget was released today and contains a headline grabbing proposal to cut the Strategic Petroleum Reserves (SPR) in half from about 688 million barrels today to 260 million barrels in 2027.
The budget proposes to sell 270 million barrels over ten years that the budget expects to raise $16,586 billion for the US Treasury. This amounts to about 95,000 barrels a day of sales at a government-estimated average price of about $61 per barrel. The budget cites rising US domestic production and lower imported oil as justification for the sales and that a SPR of about 260 million barrels “will provide sufficient protection in the event of an energy crisis and would maintain compliance with international agreements.”
The reason the Trump budget proposal would result in a cut of more than half the SPR is because Congress used SPR sales as a piggy-bank in 2015 and 2016 laws to raise revenue by selling 190 million barrels.
We think it’s highly unlikely that Congress enacts the President’s proposal to cut the SPR.
It is understandable that some might think that Congress is already on board with additional SPR sales since they have done the same in 2015 and 2016. But those SPR sales raised significant concerns expressed by key energy leaders in Congress about putting the nation at risk in the event of a supply disruption. Cutting the SPR by an additional 270 million barrels would be a move too far and viewed as too risky for these energy leaders in Congress.
While the budget document correctly states that crude imports to the US have been reduced significantly over the past several years, the crude types required by US refiners has not. The increased production of light crude grades from US shale cannot replace the medium to heavy crude grades currently used by US refiners. Therefore, the current level of imports is likely a floor unless US refineries undertake expensive modifications and regulations are changed to permit such modifications. As a result, there is premium to retaining the heavier crude levels in the SPR.
