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US oil reserves sales would impact producers: Expert
- "In essence, the government will be competing with domestic producers," experts says on sale of US strategic oil reserves

President Donald Trump's budget proposal to sell from the country's strategic petroleum reserves (SPR) would have an adverse impact for American oil producers, an expert told Anadolu Agency on Wednesday.

As part of the 2018 fiscal plan, Trump's administration proposed Tuesday selling half of the SPR, estimating to raise a total revenue of $16.6 billion between 2018 and 2027.

"I think that the sale of oil from the SPR will be negatively portrayed by some oil producers as the government competing with producers," said Ed Hirs, an economist at the University of Houston.

"In essence, the government will be competing with domestic producers," he added.

The SPR in the U.S. stood at 688.1 million barrels for the week ending May 12, according to the Energy Information Administration (EIA) data. If the federal government estimates to raise a revenue of $16.6 billion from selling half of these reserves, this means that the projection is based on selling a barrel of SPR crude for $48.2 -- lower than the current market price.

American benchmark West Texas Intermediate stood at $51.50 per barrel on Tuesday. This makes it difficult for American oil producers, who are already under pressure of low oil prices, to compete with the federal government.

The U.S. government, on the other hand, will not sell all of the SPR at once, but spread it over a decade.

"Selling off half of it over a ten-year period equates to about 95,000 barrels per day, which given that U.S. production is currently around 9.3 million barrels per day, would be a relatively small increase in supply," Thomas Pugh, a commodities economist at London-based Capital Economics, said in a note.

The U.S., however, may not need huge amounts of crude stocks, as the country's oil production has risen and imports have decreased since 2008.

"Now that the U.S. output has almost doubled compared to ten years ago and imports have fallen by 30 percent, it is questionable whether the U.S. still needs such a large strategic stockpile of oil," he said.

The U.S. Congress passed legislation in 2015 and 2016 that approved sales of 190 million barrels from the SPR between 2017-2015 to improve the country's ageing highway infrastructure.

Some lawmakers and experts, however, criticized this since it is against the policy of holding strategic stocks.

The SPR is intended to be used by the federal government as a buffer against potential supply disruptions, such as in times of natural disasters, unforeseen supply cuts, or wars.

"SPR is not a cash cow. It is a strategic asset militarily," Hirs said, adding "A reserve is meant to be a reserve and not some sort of piggybank to be used for different purposes."

It is also unclear whether oil sales from the SPR would have a negative impact on the global oil market and crude prices.

"... the impact on oil prices from a gradual sell-off of the SPR is likely to be small," Pugh said.

Hirs, however, emphasized that oil supply resulting from the SPR can influence the market and prices quicker than American oil producers combined.

"The SPR can be turned on and off at up to 4 million barrels per day. Shale production cannot be. The shale production relies upon private producers who cannot add 4 million barrels per day in a week's time," he explained.

By Ovunc Kutlu in New York

Anadolu Agency

energy@aa.com.tr

 

 

 

24 May,2017
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