The US Department of Energy’s offer to sell 11 mb from US strategic oil reserves earlier this week is part of a larger congressional mandate, and its timing is far from coincidental, RBC’s Commodity Strategy team writes. The notice contained three details worth highlighting, which include the delivery period, the pricing, and the potential SPR (The Strategic Petroleum Reserve) placement rate.
The Strategy Behind a Strategic Release
The Notice of Sale earlier this week by the US Department of Energy of 11 mb of sour crude from US strategic oil reserves is part of a larger congressional mandate, which collectively involves selling around 285 mb between 2017 through 2027, with most of the proceeds going toward different initiatives implemented through the US Treasury Department. The SPR’s timing is convenient: it makes President Trump look like he is protecting the economy by trying to lower retail petrol prices ahead of both crucial US midterm elections and the ramp-up of Iranian sanctions later this fall. However, gasoline prices typically trend lower heading into the fall anyway as domestic refiners head into seasonal maintenance and the summer driving season comes to an end.
Timing is Everything
Interestingly, the SPR contained a clause emphasizing that early deliveries are not an option. However, requests for early delivery were encouraged and accommodated to the maximum extent possible in the past, so that, during emergencies, barrels can come to market in 13 days. This places additional barrels on to the US market at precisely the time that the barrels are not needed – when refiners are offline for maintenance.
No Sample Sales
The government also indicated that it would not be offering samples prior to delivery. While past sales have often included similar stipulations, after complaints due to contamination headlines earlier this year, this may result in further markdowns beyond the typical discount associated with SPR sales to entice buyers.
Beware of Hung Deals
Earlier this spring, the DOE offered to sell 7 mb barrels of crude from strategic reserves, but only 5.2 mb ended up being sold. Either a lower than anticipated amount of offers were deemed acceptable or there was simply not enough buyers. If the government is unable to place the pre-announced 11 mb sale, that would suggest the market is not short of barrels, which should delegitimize Trump’s tweets that OPEC needs to bring more barrels online. This could, potentially, reinforce a fundamental price floor once the market has spoken.