Editor's Note: Below is an abridged institutional research note written by Senior Energy Policy analyst Joseph McMonigle. To read all of our institutional Energy Policy research email sales@hedgeye.com.
As oil prices rise, the chatter in the echo chamber is also rising about President Trump tapping the Strategic Petroleum Reserve (SPR) with several news reports that a SPR release was under “active consideration.”
We’ve been waiving off reporters and others about the idea of an immediate SPR release since the OPEC meeting in late June. We believe a SPR release is very unlikely this summer -- unless to address a major supply disruption or natural disaster. In addition, there is considerable opposition by high level administration officials to tapping the SPR for this purpose.
Department of Energy is always considering the necessity of a SPR release. In February when the administration was considering sanctions on Venezuela oil sales, DOE was quietly assessing and planning logistics for a SPR release to provide replacement crude for Gulf refiners in the US.
In addition, there are also planned SPR sales that are being staggered every couple months to comply with Congressional appropriations bills that utilized the SPR to pay for other budget priorities. With global spare capacity approaching narrow margins, the raiding of the SPR by Congress is not looking so smart.
In our view, it doesn’t make sense politically to do a SPR release now to address high oil prices. If it is to be used for this purpose, we suspect that the timing would occur in the fall in late September or October. President Clinton tapped the SPR for this reason, and we don’t doubt that Trump would do so as well but closer to election day.
However, we do think the threat of a SPR release is being used as leverage with the Saudis and other Gulf producers to ramp up production to mitigate high oil prices this summer. Certainly, a SPR release would not be a welcome development from Saudi Arabia or OPEC’s point of view.
But Saudi Arabia has increased production by 400,000 barrels per day (b/d) in June, and we expect a similar number in July.
Separate from a symbolic SPR release before the election, we do think the situation in Venezuela requires monitoring. As we have said in previous notes, we believe Venezuela production will decline another 500,000 b/d this year and drop below 1 million b/d. From our experience at the IEA and DOE, this type of supply disruption would easily justify a release of crude reserves from the US and possibly a coordinated release by the IEA.
In short, the media is getting ahead of the game here and probably being driven by the echo chamber in the oil sector. It is very unlikely that there will be any immediate SPR release this summer but you could possibly see one in the fall to counter high gasoline prices or address legitimate concerns about supply disruptions in Venezuela.
