U.S. surprises oil market with sale from strategic reserve

WASHINGTON Wed Mar 12, 2014 3:10pm EDT

Barricades protect the entrance to the U.S. Department of Energy's Stategic Petroleum Reserve in Bryan Mound, Texas May 20, 2008. REUTERS/Donna W. Carson

Barricades protect the entrance to the U.S. Department of Energy's Stategic Petroleum Reserve in Bryan Mound, Texas May 20, 2008.

Credit: Reuters/Donna W. Carson

Related Topics

WASHINGTON (Reuters) - The United States will hold the first test sale of crude from its emergency oil stockpile since 1990, offering a modest 5 million barrels in what some observers saw as a subtle message to Russia from the Obama administration.

The Energy Department said the test sale had been planned for months, timed to meet demand from refiners coming out of annual maintenance cycles. But oil traders noted that Russia's effort to take over the Crimea region from Ukraine has prompted calls for use of booming U.S. energy resources to relieve dependence on Russian natural gas by Europe and Ukraine.

Oil prices dipped to their lowest levels in a month after news of the test sale, which closes in two days.

Officials said the release would ensure that oil stored in vast salt caverns could still reach local refiners affected by recent changes in pipeline infrastructure.

"Due to the recent dramatic increase in domestic crude oil production, significant changes in the system have occurred," department spokesman Bill Gibbons said. The test sale was needed to "appropriately assess the system's capabilities in the event of a disruption," he added.

Surging U.S. shale oil production has upended the logistics of U.S. crude markets. Major pipelines that traditionally moved oil from the Gulf to the Midwest have reversed course, moving a glut of shale oil from places like North Dakota to points south.

Analysts say President Barack Obama has been more willing than his predecessors to tap the strategic reserve, noting that he did so in 2011 as part of an international response to civil war in Libya. While that 2011 sale was an emergency release, the Energy Department has said the latest sale is a test of the reserve's operations.

U.S. crude was down more than $2 to around $97 a barrel by midday.

Many questioned whether the U.S. Strategic Petroleum Reserve (SPR) was large enough to send a meaningful political message to Russia, especially since U.S. law still bans most exports of U.S. crude oil. The SPR holds enough oil to cover U.S. crude oil imports for about 80 days.

"It could be a message from Obama that says, ‘Russia, we can impact the price of oil if we want to.' But I think that's giving the administration too much credit at this stage," said Dominick Chirichella, senior partner at Energy Management Institute in New York.

Republican lawmakers concerned about Crimea have stepped up calls for the administration to approve natural gas exports more quickly to pressure Moscow. But a dearth of U.S. terminals to export liquefied natural gas means significant exports are years away, limiting the immediate use of gas as a geopolitical tool.

Chirichella said the U.S. test sale was small in the "whole scheme of things" and the International Energy Agency might be more able to send a signal to Russia, representing oil reserves for 28 countries including the United States and much of Europe.

CHANGING LOGISTICS

The administration said the focus of the sale was to test the stockpile's ability to respond to changing market logistics. The Energy Department will offer sour crude from its West Hackberry and Big Hill reserve sites on the U.S. Gulf coast. Bids are due March 14.

While abundant light sweet crude supplies flood the U.S. market, Gulf coast refineries are actually better suited for heavier sour crude and still require imports from countries including Saudi Arabia and, occasionally, Russia.

"It makes good sense to make sure that the ability ... to deliver oil to the market in a time of emergency has not been impaired by the rapid changes we have seen in the Gulf Coast crude transportation infrastructure," said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and formerly a senior White House energy adviser.

The latest sale comes at a time of growing internal debate over the future role of the SPR, given the unexpected surge in domestic crude output. One senior White House advisor has advocated allowing exports of SPR crude, to have a greater impact on global supplies and prices.

(Additional reporting by Elizabeth Dilts and Timothy Gardner; David Gregorio)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (10)
MitchS wrote:
Two words: Keystone Pipeline. Time to stop wasting time and get it going. Of course, Kerry and Obama won’t budge on this, but it just makes sense at every level!

Mar 12, 2014 11:11am EDT  --  Report as abuse
nodeficit wrote:
I think it is a great idea to test the ability to move the stock pile. More important is to see if it has any bearing on the price at all. Next question should be is there a role for government in housing, insurance, healthcare, investing, banking, farming, and entertainment or is it better left to the private sector.

Mar 12, 2014 11:29am EDT  --  Report as abuse
cheeze wrote:
Good ol supply and demand, does this mean a few weeks of relief at the pump? Let’s see.

Mar 12, 2014 12:49pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.