With questionable long-term market impact, Trump's SPR plan faces uncertain path in Congress

President Trump's plan to blunt the impact of the collapse in oil prices on domestic producers by buying as much as 77 million barrels of crude for government stocks faces two key questions this week: Will Congress agree; and will the proposal have any significant impact on the market?

On Friday, Trump announced that in response to the dual effects of the spread of the coronavirus on global demand and the collapse of the OPEC+ agreement, the US government would buy crude for the Strategic Petroleum Reserve and "fill it right up to the top."

In a brief memo issued late Friday, US Energy Secretary Dan Brouillette directed Steven Winberg, DOE's assistant secretary for fossil energy, to "immediately initiate the process of purchasing American-made crude oil for storage in the US Strategic Petroleum Reserve as expeditiously as possible."

A "solicitation for the purchase of oil" will be issued "as soon as possible," Shaylyn Hynes, a DOE spokesman, said.

Oil futures rallied in aftermarket trading shortly after Trump's announcement Friday, with ICE front-month Brent hitting $35.95/b and prompt NYMEX WTI topping out at $33.86/b, up $2.10 and $2.13, respectively, from their Friday settles.

However, by the market open Sunday evening, prices again turned lower. At 2206 GMT, ICE Brent was trading around $33.11/b, down 74 cents from its Friday settle, while NYMEX crude was trading 40 cents lower at $31.33/b.

Trump's plan is a stark departure from May 2017 when the Trump administration proposed selling off half the SPR, which was roughly 270 million barrels of crude oil at the time, shut two of four SPR storage sites on the Gulf Coast and sell its 1 million-barrel gasoline reserve in the Northeast. That proposal was forecast to raise about $16.6 billion over a decade, but it was never taken up by Congress.

Likewise it is uncertain that Congress will ever take up this plan to buy enough to fill the SPR to its 713.5 million storage capacity.

"We continue to see political headwinds," analysts with ClearView Energy Partners said in a note Saturday, noting that it would be "problematic" for House Democrats to approve a plan depicted by Trump as "saving" the US oil industry.

In an interview with S&P Global Platts, Glenn Schwartz, director of energy policy at Rapidan Energy Group, said the Democrat-controlled House of Representatives would be unlikely to go along with any plan to bailout domestic fossil fuel producers without significant tradeoffs, such a tax breaks for renewables or federal incentives for electric vehicles. Trump would likely find such concession unpalatable, Schwartz said.

Analysts said DOE would likely be barred by federal law from purchasing SPR crude.

A program used during the Clinton and George W. Bush administration in which the government accepted oil for the SPR from producers in lieu of cash royalties for production on federal lands and waters was ended in September 2009 by President Obama's Interior Department.

However, ClearView analysts said DOE could "reprogram" an estimated $850 million from previous SPR sales intended to fund modernization of the SPR, a path Democrats in Congress may be more amenable to. The Trump administration would then continue to pursue other paths to the estimated $1.6 billion needed to fill the SPR.

FILL RATE QUESTIONED

But even with the purchases approved, it is also unclear when the potential deliveries of US crude into government stocks would begin and whether these new flows would have any noticeable effect on prices.

In a 2016 report, DOE put the maximum fill rate of the SPR, which includes four sites along the Gulf Coast, at about 785,000 b/d, but analysts believe the actual fill rate may be closer to 500,000 b/d and might be as low as 200,000 b/d. This means it could theoretically take more than a year of deliveries to fully fill the SPR and, even while underway, may only have a marginal difference on the expected spike in supply and potentially historic decline in demand.

In addition, the impact of filling the SPR on the supply picture may depend on the crude being purchased. While some analysts have said the US may buy some of the Saudi or Russian medium sour crude expected to soon flood the market at discount, Brouillette's memo Friday clearly directs the purchase of only "American-made" crude.

Analysts with ClearView said that filling the SPR with US sour grades, such as Mars or West Texas Sour, might "deliver more of a volumetric punch" initially than a fill of light grades such as WTI.

Still, with additional US sanctions on Venezuelan crude flows expected, the spread between light and heavy barrels will likely narrow.

"In that context, and amid coronavirus demand pressures, even a small bid on medium and sour grades could marginally disadvantage refiners looking for substitutes," ClearView analysts wrote.