SPR weapon 'fizzled'

July 11, 2011
Markets shrugged off the International Energy Agency’s release of 60 million bbl of crude and petroleum products from emergency government supplies in a vain attempt to drive down energy prices.

Sam Fletcher
OGJ Senior Writer

Markets shrugged off the International Energy Agency’s release of 60 million bbl of crude and petroleum products from emergency government supplies in a vain attempt to drive down energy prices. “The secret weapon just fizzled,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London. Strategic petroleum stocks held by the US and other developed countries against emergency shortages “seem to be more powerful in the imagination than they are in reality,” Horsnell said. “In this case the more the market looked at it, the more the secret weapon looked like a pop gun.”

On June 23 when IEA announced the release plan, West Texas Intermediate dropped $4.39 to $91.02/bbl on the New York Mercantile Exchange while in London, North Sea Brent crude fell $6.95 to $107.26/bbl. Within a few days, prices were trending back up. By July 7, WTI climbed to $98.67/bbl and Brent jumped to $118.59/bbl.

In the interim, the Energy Information Administration said commercial inventories of WTI declined 900,000 bbl to 358.6 million bbl in the week ended July 1. Gasoline inventories were down 600,000 bbl to 212.5 million bbl in the same period, and distillate fuel stocks dipped 200,000 bbl to 142.1 million bbl. Olivier Jakob at Petromatrix, Zug, Switzerland, said commercial stocks of crude and products are “very comfortable” ahead of the pending release of 30 million bbl of crude from the US Strategic Petroleum Reserve. Gulf Coast inventories of crude were about the same as in 2009 or 2010, while crude imports into the Gulf Coast “were at the second-highest level for the year due to the largest weekly discharge of Saudi crude oil since November 2010,” he said.

Horsnell observed, “The sheer strength in demand has been one of the largest components responsible for the steady increase in prices after the 2008-09 recession.”

‘Gaming the system’
SPR crude was offered in “a straight sale” to refiners, rather than have the companies simply replace it at a later date. Refiners and investors were enthusiastic in their response.

The Department of Energy said July 1 its tender was oversubscribed, with 28 “apparently successful” bids for a total of 30.64 million bbl. Prices offered in the apparently successful bids were $104.98-108.88/bbl, with an average price of $106.91/bbl. DOE earlier said it could refuse bids more than 5% below its base reserve price of $112.78/bbl.

However, Larry Goldstein, special projects director at the Energy Policy Research Foundation Inc., Washington, DC, told OGJ that 24 of the 52 apparently successful bids announced by the DOE “were well below the 5% discount range.” The low bidders “understood the system and knew how to game it,” said Goldstein. They recognized the US government was determined to sell the crude to force down prices, “not merely offer it for bidding.” As a result, some companies submitted initial bids for specified amounts of crude and then bid for additional amounts at prices “$2/bbl lower,” he said.

“This sale, which has proven to be poorly timed, has subsidized a part of the refining sector that the White House was going after for allegedly getting too many subsidies,” said Goldstein. “ConocoPhillips and ExxonMobil Oil Corp., to their credit, tried to play it straight. But [other] traders understood the administration’s intent, which was to move 30 million bbl of oil, and were able to aggressively bid and win.”

The lowest apparently successful bid was $104.98/bbl submitted by Barclays Bank PLC for 200,000 bbl of SPR crude. Valero Energy Corp., San Antonio, had “multiple successful bids,” paying as little as $105.62/bbl and as high as $109.76/bbl, Goldstein said. J.P. Morgan Ventures Energy Corp., Stamford, Conn.; Hess Energy Trading Co. LLC (Hetco), New York; Trafigura AG, Houston; and BP Oil Supply, Chicago “had winning bids from as low as $105.01/bbl (Hetco) to $105.33/bbl (J.P. Morgan),” he said. “Vitol Inc., Houston, had four successful bids, all at a relatively high offer of $108.05/bbl.”

(Online July 11, 2011; author’s e-mail: [email protected])