Oil prices surged to their highest level in more than three years on Thursday, as the number and volume of supply outages continues to rise. The odds of a significant shortfall in supply are also growing by the day. With U.S. midterm elections nearing, the more oil prices continue to rise, the more likely it is that President Trump decides to tap the strategic petroleum reserve (SPR) to tamp down oil prices just ahead of the November vote.

The 180-degree turnaround in the oil market from May is pretty staggering, even for an oil market steeped in volatility and uncertainty. In late May, rumors of higher output from Saudi Arabia and Russia led to a crash in prices, and led to speculation of another lengthy downturn. By late June, however, it isn’t clear that even a massive 1-million-barrel-per-day increase from OPEC+ will be enough to fill the worsening supply gap.

That means higher oil prices are likely. WTI has spiked by about $8 per barrel since last week, and continues to climb higher. “We are in a very attractive oil price environment and our house view is that oil will hit $90 by the end of the second quarter of next year,” Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch, said. “We are moving into an environment where supply disruptions are visible all over the world… and of course President Trump has been pretty active in trying to isolate Iran and getting U.S. allies not to purchase oil from Iran,” he added.

As has been widely reported, the Trump administration has aggressively pressed Saudi Arabia to boost output to offset declines from Iran. Saudi Arabia has complied, promising to ramp up output to about 11 mb/d in July, up from less than 10 mb/d in May. It’s an astounding increase, both in terms of volume and the speed of the increase.Related: The Saudis Won’t Prevent The Next Oil Shock

But it still might not be enough. Outages in Libya, Venezuela, Iran, Canada, Angola and Kazakhstan will probably more than overwhelm the increase in supply from Saudi Arabia.

That raises the odds that Trump turns to the SPR to head off higher oil prices. “We think that WTI would not have to advance much further before the U.S. Strategic Petroleum Reserve (SPR) is brought into play,” Standard Chartered wrote in a note. “Higher gasoline prices, particularly in the Midwest, are likely to provoke a SPR release in the run-up to November’s mid-term elections.”

U.S. politicians have historically been pretty reluctant to draw down on stocks from the SPR. The operating principle is that the SPR is only to be used in the event of an emergency, a true supply crunch. A look back at past SPR sales shows how sparingly it has been used. The below list is from the U.S. Department of Energy’s website:

• 2014 March: Test Sale – 5 million barrels
• 2011 June: IEA Coordinated Release – 30,640,000 barrels 
• 2005 September: Hurricane Katrina Sale – 11 million barrels
• 1996-97 October; January; April: Total non-emergency sales – 28 million barrels
• 1990/91 September, January: Desert Shield/Storm Sale – 21 million barrels
(4 million in August 1990 test sale; 17 million in January 1991 Presidentially-ordered drawdown)
• 1985 – November: Test Sale – 1.0 million barrels

The norms surrounding the SPR have eroded in the past few years, however, largely due to the surge in U.S. oil production. The dramatic cut in net imports, combined with the general perception of abundant supplies, has diminished the political salience of the SPR. In 2011, when President Obama tapped the SPR in the aftermath of the Arab Spring and the outages in Libya, there was a lot of criticism about his political motivations. A few years later, the U.S. Congress is legislating sales of the SPR for budgetary reasons, essentially putting an end to 40 years of U.S. energy security strategy.

All of that is to say that the Trump administration will have no qualms about pulling barrels out of the salt caverns in Texas and Louisiana, and dumping oil onto the market to push prices down, especially as he faces political headwinds heading into the November midterm elections. The Congressionally-approved sales of the SPR, and the lack of uproar that it caused, would take the sting out of the political fallout from releasing oil from the SPR. Although, to be sure, the norms-busting President probably wouldn’t feel constrained by tradition anyway.

The oil market is tight and trending in a bullish direction, but the release of barrels from the SPR would be one of the few surprising developments that could hit the pause button on the rally in prices.


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