Analysis: Clock ticking on U.S. SPR release to avert summer gasoline spike
NEW YORK (Reuters) - President Barack Obama faces an unforgiving foe in his bid to marshal global support for releasing strategic oil reserves: time.
For maximum effect, the Obama administration needs to tap into U.S. government reserves no later than the end of this month to avert a spike in gasoline prices to $5 a gallon this summer, which could roil his re-election bid, analysts say.
The urgency to get physical barrels on the market has been increased by growing expectations that Obama will do what no other president has done before -- tap the Strategic Petroleum Reserve (SPR) twice.
As diplomatic efforts intensified, French officials said last week that a move may come soon, and Britain has signaled its willingness to join too, sources say. Most traders now say a release of reserves is a question of when, not if.
Having lost the element of surprise that would have delivered a quick blow to prices, Obama will be forced to wait and watch while physical barrels of crude slowly work their way through the global oil system. There are also potential new logistical hurdles from last year when the government tapped the strategic reserve to make up for the loss of Libyan crude.
To build up gasoline stocks ahead of the Memorial Day kickoff to the U.S. driving season in late May, the government would need to hold a bidding round within weeks for the emergency reserves. It would also have to work with companies to schedule deliveries of crude to refineries for processing.
"From the time of the release to the time the oil gets to a refinery and the products to the market is generally about 40 to 45 days," said Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution, who has served as an energy policy advisor to over 50 governments.
"If you think it is going to have any downward pressure on gasoline prices, you'd want to do it about now so that the gasoline would be in the market at the peak of the driving season."
The White House has said all options, including a strategic petroleum reserve drawdown, are on the table to bring down prices, but has been mute on the timing of any action.
But pressure is mounting to tap reserves soon, with global crude production down more than a million barrels per day (bpd) due to a string of small disruptions worldwide. The price of Brent crude is up 15 percent this year at around $125.
Last year's release announcement in June caught the market by surprise -- sending oil prices plummeting $10 in one day. This time, a possible move has been discussed publicly.
The immediate impact may also be blunted by last year's 60-million-barrel International Energy Agency action, which many traders and analysts said set a precedent for a more liberal use of government-held reserves.
HOW SOON IS NOW?
A year ago, it took nearly a month after the release was announced on June 23 before the first delivery was made; final shipments were not completed until the end of August. Oil prices rebounded over that time to where they were before the release was announced.
"When we did the Libyan release, we had trouble getting the barrels scheduled -- if you know in advance that you want to schedule the barrels into the pipeline system, then you can do it," said Amy Jaffe, an energy policy expert at Rice University's Baker Institute in Houston.
"If after you lose the supply you have to spend a month doing the bidding and then you have to wait another six weeks before it gets through the refinery gates, then by the time the gasoline gets to the market -- you are talking about September and October and it's already too late."
The dynamics of the U.S. market have also shifted dramatically since last year, creating additional logistical hurdles that could delay or complicate deliveries from the Strategic Petroleum Reserve.
Crude can be drawn from the reserve at a rate of 4.25 million barrels per day currently, according to an official with the Department of Energy, slightly below design capacity. But some analysts have questioned whether the slower distribution of oil from the 2011 release indicates rates would actually be lower. The U.S. currently imports around 9 million bpd.
The surge in crude production from Canada and North Dakota has prompted the reversal of the Seaway pipeline, which carried crude from Texas to Oklahoma. That has lowered the capacity to draw down crude from the SPR's largest storage cavern.
The reserve was created in the 1970s to move crude from the Gulf Coast to refiners north of the region, which is now flush with rising supplies. Moving crude on ships has been complicated by the potential shutdown of three refineries on the U.S. East Coast, which left the region in need of fuel -- not crude -- to avoid a price spike.
"If we're just releasing U.S. barrels into the U.S. Gulf then that has a questionable impact," said Katherine Spector, commodity strategist for Canadian Imperial Bank of Commerce in New York.
While Gulf Coast refiners could make up for much of that fuel demand, it would have to be shipped on U.S.-flagged vessels under the requirements of the Jones Act. The government must use that fleet as much as possible in an SPR release, however, which could tax the availability of ships to haul fuel to the East Coast and necessitate the use of waivers to allow foreign-flagged vessels.
In addition, the United States has struggled to gather support from other IEA members that gave extra strength to last year's efforts. Britain has expressed potential willingness to tap its own government stockpiles, as has France, which also faces pressure from elections in May, have .
But the head of the IEA, Maria van der Hoeven, has said on several occasions that a coordinated IEA release is not warranted because there is no significant supply disruption on world oil markets. Germany and Italy say they are opposed.
Opponents insist the reserve, which can cover roughly 80 days of petroleum imports, should only be used in the case of a major supply disruption.
Obama's use of the reserve last year appears to have created a perception among traders that consumer countries can intervene in markets in the same way producers can withhold oil exports to bolster prices or central banks can adjust policies to affect the flow of credit through the monetary system.
Congress recently modified the law governing the reserve so it could also be used if a disruption caused a major rise in petroleum prices that threatened the U.S. economy. Experts say using the SPR frequently to bring down prices sets up an expectation in markets, however, that could dull the ability of a release from the reserve to bring down prices.
"Every time you use it the effect is potentially dampened in the future," said Spector. Supporters of an SPR release say when the full weight of U.S. and EU sanctions against Iran, aimed at ending Tehran's nuclear ambitions, take effect in July, the market could face even greater supply shortfalls and price spikes due to the lack of oil from OPEC's No. 2 exporter.
Traders are also nervously watching for signs of an Israeli attack on Iranian nuclear installations, which the West fears could be aimed at making a bomb but that Tehran insists are for peaceful purposes. A release of extra barrels into the market could help limit any price jump from a strike.
Some traders had been concerned that Saudi Arabia, the only country with significant spare capacity to raise production, could trim output levels if consumers draw down emergency stocks. Those worries eased on Tuesday on news the kingdom would likely maintain production at current high levels.
NO SURPRISE NEEDED?
Supply problems from Syria, Yemen, the North Sea and South Sudan have already trimmed global oil supplies by more than 1 million barrels per day (bpd) this year, and there are growing signs that sanctions against Iran are hitting its exports.
Obama on Friday vowed to forge ahead with tough sanctions on Iran, saying there was enough oil in the world market -- including emergency stockpiles -- to allow countries to cut Iranian imports.
While the element of surprise release may be gone, analysts say it still has considerable power in the market.
Oil economist Phil Verleger said the sale of oil from strategic reserves would limit the power of large producers -- those that pump more than 1 million bpd -- to move prices higher by limiting supplies when markets are tight.
"If they take one cargo off the market, they raise prices enough to mean they earn more money -- that applies to Exxon, Shell, that applies to countries like Nigeria," Verleger said.
"If they announce an oil sale, even if the surprise is gone, they have removed the ability of the large oil companies and any oil exporting country to manipulate prices -- this is $10-15 a barrel. That's a big deal."