- President Donald Trump has repeatedly expressed concerns about energy costs.
- Rising gas prices could create a political headache for Republicans ahead of the midterm election.
- Some analysts think Trump could turn to an emergency US oil reserve.
“REDUCE PRICING NOW!”
That was President Donald Trump’s message to OPEC last week, adding that “gas prices are up & they are doing little to help.”
It was just the latest in a string of tweets taking aim at the oil cartel about energy costs. And ahead of the midterm election, where rising gas prices could hurt his party, the outbursts have raised questions about whether the president might turn to tapping a federal oil stockpile called the Strategic Petroleum Reserve.
“We think that WTI would not have to advance much further before the U.S. Strategic Petroleum Reserve (SPR) is brought into play,” Standard Chartered analysts wrote in a recent note.
The SPR, created following the 1970’s energy crisis, is mainly intended to be an emergency stockpile the US can turn to during war or natural disaster. But non-emergency releases can be authorized to respond to minor supply disruptions or to raise federal revenue, according to the US Energy Department.
Under the Energy Policy and Conservation Act, the president can decide whether an SPR release is justifiable by a potential energy supply shortage “of significant scope or duration.” While price level itself would likely not qualify under that standard, according to UBS analyst Jon Rigby, mounting supply outages could.
“With Venezuela and Iran already subject to sanctions and US onshore production and exports now limited by infrastructure, one of the US’s most significant remaining market levers is its Strategic Petroleum Reserve,” Rigby said.
But concerns over global supplies are clear and growing. Crude has rallied in recent months, with the US benchmark trading above $73 a barrel and prices at the gas pump hitting four-year highs.
Political and economic turmoil that’s been weighing on output from key producers, including Venezuela and Libya, shows no sign of letting up. And an oil-worker strike in Norway and a major outage in Canada are expected to take barrels off the market over the next few months.
Perhaps most important, the State Department last month ordered most countries to cut off oil imports from Iran by November. The move is part of Trump’s decision earlier this year to withdraw the US from the Iran deal, which lifted sanctions on the country in exchange for restraints on its nuclear weapons program.
The Trump administration has looked to Saudi Arabia to help make up for falling output. The unofficial OPEC leader said it has a spare capacity of 2 million barrels a day, according to Trump, implying production of about 12 million barrels per day.
But some analysts question how practical that would be. Saudi Arabia has never pumped more than 10.6 million barrels per day on average over a single month, according to analysts at the Bank of America Merrill Lynch.
“It appears the oil market has little confidence that Iran volumes can be easily replaced,” BAML said.
While that could create a political headache for Republicans down the ballot in November, it isn’t clear if Trump would consider an SPR release. The White House did not respond to an email requesting comment.
Rigby said an SPR release would initially lower prices. But he added that – like raising Saudi Arabia’s production – it could have the opposite effect in the long-run.
“We think it would highlight the structural tightness of the market and the lack of options available to deal with it,” he added.
- Markets Insider