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Abu Dhabi, UAETuesday 23 October 2018

Donald Trump may do the unthinkable to blunt gas prices

Flooding markets with America’s crude stockpiles would provide US consumers some temporary relief at the pumps but it would be risky

US President Donald Trump at United Nations Headquarters in New York. Federal law allows a president to release up to 30 million barrels from the SPR.EPA
US President Donald Trump at United Nations Headquarters in New York. Federal law allows a president to release up to 30 million barrels from the SPR.EPA

If US President Donald Trump can’t persuade Opec to raise production, he still has the Strategic Petroleum Reserve (SPR) to call on.

Flooding markets with America’s emergency crude stockpiles may give US consumers some temporary relief at the pumps but it would be a risky and unorthodox strategy, even for a politician with a reputation for disregarding convention.

Stored in salt caverns around the Gulf of Mexico and holding 660 million barrels, the SPR is the world’s largest backup hoard of crude. Established in the wake of the Arab oil embargo of 1973, the reserve has been released 19 times, according to the Department of Energy (DOE). These drawdowns were mostly a result of supply disruptions and to bring down domestic gasoline prices.

However, draining these caverns to lower oil prices isn’t as straightforward as it sounds for Trump. Federal law allows a president to release up to 30 million barrels from the SPR. In 2011, President Barack Obama authorised 30 million barrel drawdown, but this was part of a coordinated response with the International Energy Agency to supply disruptions caused by the Arab Spring revolts. Oil prices nudging above $81 a barrel hardly constitutes an economic crisis, even if the timing is inconvenient ahead of US mid-term elections.

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“An SPR release may generate bearish headlines, but our research indicates SPR releases are limited in their ability to materially and durably lower gasoline pump prices - Trump's top concern,” said US consultancy Rapidan Energy Group’s Scott Modell.

If Trump loses patience with Opec after his jawboning over high oil prices went unheard, a move to use the SPR would be almost unprecedented.

Although the potential loss of Iranian oil exports because of sanctions could provide some justification, the administration would still be selling emergency crude stockpiles to offset potential supply shortages in foreign markets, not in the US.

"Choosing the earliest possible opportunity afforded by statute would appear to reflect President Donald Trump's concern regarding oil market tightness associated with the reinstatement of Iran oil sanctions," Kevin Book, managing director of ClearView Energy Partners, said in a research note.

Even so, any release like the one the Trump administration may be considering would supply non-US companies with a US government asset in order to protect them, at least partly, from a policy change conceived by the White House. Pursuing such a strategy may be politically savvy with voters, but it would almost certainly draw unwelcome scrutiny from Congress.

“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.”

Sanctions on Iran could provide Trump with an excuse to protect the market from disruptions if Opec kingpin Saudi Arabia and Russia can’t step up. S&P Global Platts Analytics forecasts 1.7 million bpd of Iranian crude could be lost as a consequence of the policy, which comes into force in early November.

“If US oil prices breach $80 [currently around $72 on WTI] per barrel and the Trump administration sees a firmer demonstration of Riyadh's inability to cap prices, the odds of an SPR release will be high,” said Mr Modell. However, he believes the administration will still prefer to “keep the power dry on big SPR sales”.

US gasoline prices are hovering near 4-year highs at $2.84 a gallon. Higher gasoline prices have delivered the political kiss of death to the hopes of many American presidents and Trump is unlikely to be an exception to the rule given all the other challenges his administration faces.

Regardless of Trump’s intentions, the SPR is already being drained. The US Department of Energy (DOE) recently sold 11 million barrels of sour crude from the SPR for loading over October and November. The sale is part of a previously announced drawdown for the next fiscal year, which starts in October.

Congress has passed laws requiring DOE to sell about 300 million barrels of crude from the SPR through fiscal 2027. The 11-million-barrel sale is part of two requirements: to draw down 25 million barrels over three consecutive fiscal years starting in 2017 and to sell 58 million barrels over eight consecutive fiscal years starting in 2018.

Grumbling about high oil prices and Opec on Twitter hasn’t worked for Trump, with crude now trading at new four-year highs. However, doing the unthinkable and dumping America’s crude reserves in a deluge would be harder for the market to ignore.

Paul Hickin is associate director for oil at S&P Global Platts.