Trump: Oil release from Strategic Petroleum Reserve may not work

President
Donald Trump displays a presidential memorandum after announcing
his intent to withdraw from the JCPOA Iran nuclear agreement in
the Diplomatic Room at the White House in Washington, U.S., May
8, 2018.
REUTERS/Jonathan
Ernst

• President Donald Trump is reportedly considering
  tapping emergency oil reserves 
  ahead of
  the November midterm elections.
• But some analysts doubt a release would be
  effective.
• They see it as a way to shift the conversation away
  from Trump’s decision to withdraw the US from the Iran
  deal.

As the Trump administration reportedly
considers turning to emergency oil reserves, some experts see
it as more of a distraction from foreign policy decisions that
have faced blame for rising gas prices than a meaningful effort
to address supply concerns in the energy market

The federal stockpile under consideration, called the Strategic
Petroleum Reserve, is mainly intended to be a safety net the US
can turn to during war or natural disaster. But non-emergency
releases can be authorized by the president.

“The reason [Trump] brought up an SPR release is because he wants
to change the conversation,” Helima Croft, head of global
commodities research at RBC, told Business Insider.

Through his tweets, Trump has appeared increasingly anxious about
oil prices ahead of the November midterm elections. A favorite of
his to fault is OPEC, which in 2016 struck a deal to coordinate
output cuts amid a global oil glut.

“The OPEC Monopoly must remember that gas prices are up &
they are doing little to help,” he
wrote on Twitter earlier this month. “If anything, they are
driving prices higher as the United States defends many of
their members for very little $’s.”

But Democrats have been quick blame gas prices — which recently

hit four-year highs — on the president’s decision to
withdraw the US from the Iran deal, a 2015 agreement that
lifts sanctions on the country in exchange for restraints on its
nuclear weapons program. As part of that move, the State
Department last month ordered all countries to cut off all
Iranian barrels by November. 

“According to energy analysts and experts, President Trump’s
reckless decision to pull out of the Iran deal has led to higher
oil prices,” Senate
Minority Leader Chuck Schumer said at a press conference
outside an Exxon facility in May. “These higher oil prices are
translating directly to soaring gas prices, something we know
disproportionately hurts middle- and lower-income people.”

To be sure, there is a multitude of other factors that drive oil
prices. But analysts see cutting off barrels from Iran, the
third-largest member of the Organization of Petroleum Exporting
Countries, at the top of the list. The country exported
about 2.7 million barrels per day in June.

Prior to the Iran deal, the Obama administration asked companies
to reduce oil purchases from the Islamic Republic by about 20%
every 180 days. But that is a stark contrast to the Trump
administration’s intentions of cutting off all Iranian
barrels. 

“The Obama administration never said they wanted to take Iran out
of the oil market,” Croft said. “I think people are missing that.
They think: oh well, Trump now realizes this is crazy and this
will be like Obama all over again.”

Analysts say an SPR release would initially lower gas prices
through a “knee-jerk” reaction among traders, they doubt it would
be effective for long. Jon Rigby, an analyst at UBS, thinks a
release could even have the opposite effect soon after.

“We think it would highlight the structural tightness of the
market and the lack of options available to deal with it,” he
said.

The last time Washington turned to the SPR was in 2011 when the
Obama administration released 30 million barrels to address
supply disruptions in the Middle East during the Arab Spring.

West Texas Intermediate prices were 9% higher than before one
month after the release.

And heading into the winter of 2000, the Clinton administration
sold off 30 million barrels amid concerns about heating supplies.
Prices initially fell but once again were higher than before the
release within a month.

Morgan Stanley

“An SPR release is simply not a sustainable solution for keeping
oil prices low if the US maintains its hawkish
foreign policy stance,” RBC analysts wrote in a recent note.

While energy costs alone don’t seem to rouse voters, they tend to
play into overall sentiment toward the economy. Gregory Wawro, a
political science professor at Columbia University, said that
rising prices at the pump could be damaging if they were tied
into a broader narrative about the consequences of the Trump
administration’s foreign policy decisions.

“I think it would have to be linked with a general argument
about how Republicans’ actions are hurting the
economy,” Wawro said. “​With headlines popping
up more regularly about firms cutting jobs and investment because
of the trade war, it’s possible that Democrats could build a
compelling multifaceted case that the Republicans have mismanaged
the economy on several fronts.”

Still, Croft said relying on the SPR to help mitigate the effects
of withdrawing from the Iran deal is a “high-risk” strategy,
especially with multiple other key oil producers — especially
Venezuela, Iraq and Libya — facing major output disruptions.

“We don’t have a lot of room for error if you want to prevent
higher gas prices,” Croft said. “So, I think that’s why we’re
talking about SPR. It’s more to shift sentiment as opposed to
tackling some of the structural issues.”

The White House did not respond to emails requesting comment.

Markets Insider