Why suspension of SPR price can lower oil prices

Bob Tippee

"Extrapolation of this fall's evidence could take prices as high as an unbelievable $120 if adult supervision is not brought to bear on DOE."

Consultant Philip K. Verleger Jr. issued that prophecy to two Senate subcommittees last Dec. 11. Since then, $120/bbl crude oil has become painfully believable.

Adult supervision has arrived. Under bipartisan pressure from Congress, the Department of Energy on May 16 announced it is suspending by as much as 13 million bbl this year's acquisition of crude for the Strategic Petroleum Reserve.

Until now, the Bush administration had argued that 70,000 b/d or so of crude acquisition for the SPR couldn't influence price in an 86 million b/d oil market.

That would be right if all crude were alike. It's not. And the market's longstanding preference for light, sweet crude has intensified recently because of growing requirements for light products with sharply reduced sulfur levels.

In his Senate testimony, Verleger noted that a leap in crude prices last year away from 2006 levels coincided with DOE's revival of acquisition of crude for the SPR. About 33% of crude acquired for SPR is sweet.

Verleger estimated that SPR purchases lowered global supply of light, sweet crude by as much as 0.3% and raised the price by perhaps 10%. At the time, the light, sweet crude price was $94/bbl.

The Organization of Petroleum Exporting Countries makes a companion point in its May Monthly Oil Market Report (OGJ Online, May 15, 2008).

OPEC points out that growth in demand for distillate was more than twice that of gasoline during 2000-07 while construction of refinery processing capacity tilted strongly toward the slower-growing product. So refiners must run light crude to meet soaring demand for distillate, especially diesel, and the price spread between light and heavy crude grades has widened.

Meanwhile, Iran is chartering tankers in which to store heavy crude it can't sell.

More so than usual, market tightness is a phenomenon of the light, sweet end of the crude-quality spectrum.

More so than seems probable, therefore, suspension of SPR fill can be expected to make a difference in price.

(Online May 16, 2008; author's e-mail: bobt@ogjonline.com)

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