NEW YORK (Reuters) - U.S. President Donald Trump’s proposal to sell 270 million barrels of oil from the U.S. petroleum reserve could have the unintended consequence of actually helping OPEC rebalance global petroleum markets.
OPEC meets in Vienna on Thursday. With other producing nations including Russia, the group is expected to agree to extend output cuts of 1.8 million barrels per day.
Even if Congress passes the proposed White House budget, the majority of sales from the U.S. reserve would take place years from now. Their timing might actually help OPEC reach some of its long-range goals of keeping the oil market balanced by limiting expectations of higher prices that could encourage future production.
The White House wants to raise funds by selling 270 million of the 688 million barrels of crude from the U.S. Strategic Petroleum Reserve (SPR) from 2018 to 2027. Previous budgets already authorized sales totaling nearly 190 million barrels through 2025. That amounts to 65,000 barrels per day, or one very large crude carrier each month.
Sales from the reserve under the proposal would start with $500 million in 2018 and rise gradually, peaking at nearly $3.9 billion in 2027. That would put about 74,000 bpd of additional oil into the market, a fraction of current U.S. production of 9.3 million bpd.
The plan calls for sales to rise gradually, which would tend to pressure prices for oil delivered further in the future, making the contracts cheaper than those at the front of the futures curve. Oil traders call that phenomenon “backwardation.”
Output cuts by OPEC and other producers have just started to bring down supply. But in a note this week, Goldman Sachs analysts said OPEC must do more than drain the glut to balance markets. It must also move the market into backwardation from contango, the current situation where crude contracts get more expensive further into the future.
Otherwise, U.S. shale producers will have an incentive to keep pumping at record levels, feeding more oil into the market and cutting OPEC’s market share. If sales from the strategic reserve pressure far-dated futures contracts, shale producers would be less inclined to add more rigs.
“If you’re bringing oil back into the market, that’s going to pressure prices in the longer run,” said Michael Tran, director of global energy strategy at RBC Capital Markets. “It dampens or mutes any swift moves to the upside given that selling SPR barrels will be lumpy in nature going forward.”
In January, the first of several sales totaling 8 million barrels of light sweet crude was awarded.
It was not clear if Congress would approve Trump’s budget. Also, the United States is required as a member of the International Energy Agency to hold at least 90 days of net import stocks. As of October it had coverage of about 142 days, according to the U.S. Energy Department.
Reporting by Catherine Ngai in New York, additional reporting by Liz Hampton and Erwin Seba in Houston, Jarrett Renshaw and Devika Krishna Kumar in New York; Editing by David Gregorio