President Donald Trump's proposal
to sell half of the U.S. strategic oil reserve highlights a decline in the
biggest oil user's reliance on imports - and a weaning off OPEC crude - as its
domestic production soars.
The U.S. Strategic Petroleum
Reserve (SPR), the world's largest, holds about 688 million
barrels of crude in heavily guarded underground caverns in Louisiana and Texas.
Congress created it in 1975 after
the Arab oil embargo caused fears of long-term spikes in motor fuel prices that
would harm the U.S. economy.
The White House budget, delivered
to Congress on Tuesday, proposes to start selling SPR oil in fiscal 2018, which
begins on Oct. 1. Under the proposal, the sales would generate $500 million in
the first year and gradually rise over the following years.
A release of half the SPR over 10
years equals about 95,000 barrels per day (bpd), or 1 percent of current U.S.
The drive to reduce the SPR
started under former President Barack Obama, and several sales were approved in
legislation from 2015 and 2016.
In December, Congress approved
the sale of $2 billion of crude over three years from the SPR for maintenance
and repairs. The U.S. Department of Energy sold 6.4 million barrels in January
and another 10 million in February.
The United States has more leeway
to release SPR crude now, as its production C-OUT-T-EIA has risen 49 percent
over the past five years.
Although the figure is equivalent
only to the output of a mid-sized field, it sends a powerful signal about the
United States' decreasing need for imports as its own production reaches new
The International Energy Agency,
which counts the United States as a member, requires member countries to keep
strategic stocks equal to 90 days of the previous year’s net oil and product
As of October 2016, the United
States had about 145 days worth of import coverage, according to the U.S.
Energy Information Administration.
Since the U.S. shale oil boom
began at the start of this decade, imports have fallen sharply - sometimes
dropping to as low as 7 million bpd from as high as 10 million bpd in the
middle of the last decade.
"The United States
definitely doesn't need as much SPR as they have now lower imports," said
Amrita Sen of the consultancy Energy Aspects.
"While the headlines may be
bearish, not only is this just a proposal that is unlikely to make it past
Congress, it is also phased over 10 years ... So we do not see this as bearish
for fundamentals even though the headlines won't help," she added.
Under the proposal, sales would
peak at $3.9 billion in 2027, and total nearly $16.6 billion from 2018 to 2027,
the administration said.
PVM brokerage said the plan, if
implemented, would not add dramatically to global oversupply.
Benchmark Brent and U.S. light
crude prices settled about 0.5 percent higher on Tuesday, having recouped
earlier losses of around 1 percent on the news of Trump's proposal.
The Organization of the Petroleum
Exporting Countries, of which the United States is not a member, meets this
week, and is widely expected to extend production cuts by nine months to March
2018 to help the market rebalance.
The United States released
supplies from the SPR at the start of the Gulf War in 1991 and after Hurricane
Katrina disrupted Gulf of Mexico output in 2005, and again in 2011 amid
concerns about lost Libyan supply.
The White House proposal would
also open areas of Alaska's arctic region to exploration, potentially helping
the United States further boost production.