The Impact of U.S. Test Sales of Strategic Oil Reserves

The Impact of U.S. Test Sales of Strategic Oil Reserves

First Test Sale of the US Crude Oil Reserve

For the first time since 1990, the U.S. held a test sale of its crude oil reserve, approximately 5 million barrels, from the U.S. Strategic Petroleum Reserve (USPR). According to William Gibbons, U.S. Department of Energy spokesman, the sale of the crude oil reserve served to test the capabilities of the distribution channels deemed necessary in the event of any disruption.

The Department of Energy has released results of the sale from the SPR, citing Exxon Mobile, Royal Dutch Shell as well as independent refiners Marathon Petroleum, and Phillips 66 as successful bidders.

The Strategic Petroleum Reserve (SPR) is the world’s largest supply of emergency crude oil. whose federally-owned oil stocks are stored in huge underground salt caverns along the Gulf of Mexico.

US SPR Gulf Petroleum Reserves

US SPR Gulf Petroleum Reserves

Purpose of the Test Sale

The sale took place against the backdrop of the struggles in Crimea, which raised the question of using the SPR as a geopolitical tool. Some are calling the sale a political message from the Obama administration to Russia: The U.S. is becoming a burgeoning self-sustaining and exporting oil powerhouse.

However, according to Mr. Gibbons,  the decision to hold the test sale is unrelated to the tension with Russia over the situation in Ukraine. It had been scheduled for some time now and timed in March to occur before refineries change to summer-grade gasoline and prior the start of the hurricane season.

Moreover, the chances of making any substantial exports are still years away due to the lack of U.S. oil terminals that export liquified natural gas.

Impact of the Test Sale on the Market

According to the Energy Department, the amount being sold in the test sale equates to less than one percent of the USPR and is expected to have very little impact on the market. As of March 4, 2014, the reserve held 696 million barrels of crude oil, according to information on the department’s website.

Buyers were given until March 14th to submit bids with shipping scheduled to begin April 1 and end on April 30, 2014. The purchased oil came from reserves in Louisiana and Texas.

After news of the sale was released, the price of oil dropped initially. However, prices rebounded quickly and were projected to stay above $100 through the end of the month. U.S. crude production has surged due to horizontal drilling and fracking, which has released supplies in shale formations, sometimes dubbed the “shale revolution.”

The Future of the Reserve

Heightened tensions in Russia and the Ukraine, and discussion about increasing pressure on Moscow by speeding up approvals for exports of U.S., have put renewed focus on the need for pipeline distribution expansion and construction of LNG refineries. Meanwhile internal debate continues about the future role of the SPR, given the growth in domestic crude output.