Some of the oil being released from the U.S. Strategic Petroleum Reserve to bring down prices may be held by traders for later sale rather than sent directly to refiners for processing into gasoline or other fuels.
The U.S. Energy Department is offering 30 million barrels of light, low-sulfur crude for sale, half of the 60 million barrels to be released by International Energy Agency member nations to make up for the loss of Libyan oil exports during the civil conflict. The government closed bidding for the oil yesterday.
“The DOE has no preference for bids from refiners versus traders and both have participated significantly in past sales,” an official from the Energy Department wrote in an e-mail. “There is nothing to stop buyers from putting the oil they have purchased into their own storage.”
Traders can profit from buying the oil and selling more valuable contracts for later delivery if the SPR oil is sold at a big enough discount to cover storage costs. Libya’s oil output sank to 150,000 barrels a day in June, according to a Bloomberg News survey, as civil unrest disrupted production and shipments.
“Every additional barrel of oil stored in the U.S. is a barrel that does not need to be imported, ultimately freeing up barrels to move to Europe,” Lawrence Eagles, head of oil research for JPMorgan Chase & Co. in New York, said in an e-mail. “It worked very effectively after Hurricane Katrina in 2005 and should do so this time around,” said Eagles, who headed the IEA’s oil-markets team during an earlier release.
The sale was “substantially oversubscribed,” with more than 90 offers to purchase oil, the department said in an e-mailed statement. The department expects to award contracts by July 11 and announce purchasers and sales prices at that time.
The oversubscription indicates that supply disruption is a factor and that all 30 million barrels will be placed into the market, an administration official said. The administration will continue to monitor the oil supply and is prepared to act further, according to the official.
The oil from the SPR will be sold relative to Light Louisiana Sweet, or LLS, crude prices published by closely held Argus Media Ltd. Financially settled swaps for July LLS were worth 52 cents a barrel less than August as of 4:30 p.m. in New York, according to data compiled by Bloomberg.
Storing oil on a tanker wouldn’t be a profitable option at this time, assuming a cost of 45 cents a barrel per month, said Katherine Spector, head of commodity products research at CIBC World Markets in New York. “It’s a little hard to see how that works unless it comes in below current prices or if you’re taking a view” that crude futures will rise, she said.
Representatives of trading companies including JPMorgan Chase, Morgan Stanley, Hess Trading Company and Koch Supply & Trading LP joined Valero Energy Corp. and Statoil ASA in questioning Energy Department officials June 28 about shipping options and requests for waivers of the Jones Act.
The Jones Act restricts the shipment of goods between U.S. ports to American-flagged vessels. Most oil is shipped on foreign-flagged vessels.
A lack of American-flagged vessels of adequate size means a buyer of SPR oil who wants to store it or send it to refineries on the East Coast may require a waiver of the Jones Act. There are two available tankers, according to a list on the Department of Transportation’s Maritime Administration website, along with barges that can hold up to 233,951 barrels. The per-barrel cost to ship oil typically is lower with a larger ship.
The tankers are the Overseas Chinook, currently in Brazil, and the Overseas Cascade, anchored in the Houston Ship Channel, according to AISLive shipping data compiled by Bloomberg. Each can hold 300,000 barrels of oil, the minimum parcel that can be loaded on a ship from the SPR, according to the notice of sale.
Government officials on the conference call said that oil could be loaded on one foreign vessel and later delivered back into the U.S. on a different foreign tanker, provided that information on both ships was included in the waiver application. A waiver would not be needed if oil were loaded and then redelivered to the same berth at a particular terminal, according to the officials.