MARKET WATCH: Talk of SPR release drops oil prices

Oil prices dropped Mar. 15 on reports US President Barack Obama raised the possibility of releasing strategic petroleum reserves in a Washington meeting with British Prime Minister Cameron. However, some of the initial loss was recovered after the White House labeled the report as “inaccurate” with the issue undecided.

“May Brent fell by $4/bbl during intraday [trading] before recovering about half of the loss,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. The price of West Texas Intermediate was not hit as hard, “as the market assumed that a reserve release would have much less impact on the somewhat isolated WTI market than the Brent market.” Zhang reported, “Oil products underperformed crude on the day but only slightly. The Brent structure was weakened with June-December Brent time spread falling 31¢/bbl.”

The possibility of an oil reserve release in a presidential election year is high “if oil prices don’t come off more from here.” Zhang said, “It would be just a matter of timing and what factor will trigger the release…further real supply disruptions or political motives.” He said, “We do not think a reserve release is a sustainable solution to tame oil prices. But once it is announced, it’ll inevitably lead to an immediate sharp price fall, which will force the long-position holders to rush to the door and accelerate a further price fall in the short term. This is rather evident from the ‘flash crash’ in oil prices during early May last year and price actions following the reserve release in June.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The [White House] corridor noises about the SPR release was not started yesterday; the US Energy Secretary has been mentioning over the last few weeks that it was an option.” He said, “When we consider the noise that was existing before the SPR release of last year, we have to consider that an SPR release is an option that the US administration is seriously considering.”

Nonetheless, Jakob said, “It will be difficult to have an International Energy Agency-coordinated stock release because it is difficult at this stage to describe a major supply disruption that would legitimize such a release. If the US [is considering] a SPR release, it is also because it has failed to get enough commitment from Saudi Arabia that it would pro-actively participate in calming markets on the road to the Iranian embargo. Yes, Saudi Arabia has claimed that it stands ready to act if needed, but action speaks louder than words. If the IEA is unlikely to agree to a ‘price management stock release,’ the US can do what it wants.”

SPR outlook

The recent increase in US crude production is expected to continue for some years. “The new US oil being produced is mostly very light crude oil and means that over the coming years the US should try to maximize is security of heavier, sour crude oil rather than the light, sweet streams,” Jakob said. “The US SPR is currently made of 262 million bbl of sweet crude oil and 434 million bbl of sour crude oil. Considering the current increase in US light, sweet crude oil production, it would make sense to optimize the US supply security by swapping some of those light sweet, crude oil reserves for replacement with sour barrels. Politically it would quiet the political attacks that the US president is depleting the reserves for election purposes, since the net balance in the SPR will not be touched, and the US supply security will be optimized. Pricewise, the release of the sweet barrels would have a downside impact on the crude oil benchmarks (Brent and WTI), which will result in lower gasoline prices at the pump.”

He added, “Replacing the SPR sweet barrels with Saudi crude oil would also allow Saudi Arabia not to belligerently attack the Iranian market share in Asia and will also allow Saudi Arabia not to engage in a policy of selling its oil at a discount formula since the oil sold to the SPR would not appear per se on the market. Financially, a sweet-sour swap could also result in a profit for the government, which is an additional political brownie point. Doing a sweet-for-sour SPR swap could therefore be a win-win solution for everybody.”

Jakob noted, “The SPR story sharply reduced the Brent premium to WTI, and that spread will be at a further reduction risk if the US government provides more sound-bites about it. The announcement of the SPR release last year did not have a long lasting impact on the Brent-WTI spread, but the difference this year is that there is not an acute shortage of sweet barrels, and we also have the Seaway [crude pipeline] reversal [from the Midwest to the Gulf Coast] to consider. Crude oil cash differentials in Europe are under pressure, and low differentials are now starting to recreate some support to the refining margins. Technically, the moving average momentum in Brent will perform today a negative cross-over unless Brent can print a significant rebound. The sharp sell-off yesterday tested the lows of the recent trading range ($121.50-126.50/bbl) but that range is for now still validated.”

In other news, Jakob said, “In February, gasoline sales in Italy were 20.3% lower than a year ago, diesel [was down] 15%, jet fuel [down] 6.4%, but heating oil was 21.2% higher and LPG for heating up 15.7%. Given that the heating oil market is relatively small in Italy, gas oil (diesel plus heating oil) was down 12.2% (or 288,000 tonnes) vs. a year ago. Overall sales of petroleum products were down 13.8% vs. last year. Part of that was due to the harsh winter conditions, but as per the patterns of previous months, part of it is also due to the worsening economic picture, which is now combined with fuel prices printing all-time record high in euros per liter.”

Energy prices

The April contract for benchmark US light, sweet crudes traded at intraday prices of $103.78-106.18/bbl Mar. 15 on the New York Mercantile Exchange before closing at $105.11/bbl, down 32¢ for the day. The May contract declined 30¢ to $105.65/bbl. On the US spot market, WTI at Cushing, Okla., was down 32¢ to $105.11/bbl.

Heating oil for April delivery dropped 3.93¢ to $3.22/gal on NYMEX. Reformulated stock for oxygenate blending for the same month fell 5.85¢ to $3.29/gal.

The April natural gas contract dipped 0.5¢ to $2.28/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., retreated 4.3¢ to $2.08/MMbtu.

In London, the April IPE contract for North Sea Brent lost $1.42 to $123.55/bbl. Gas oil for April fell $14.50 to $1,024/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.26 to $123.03/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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