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White House may use Iran sanctions to justify SPR draw: ex-Obama adviser

Washington — The Trump administration may use forthcoming sanctions on Iranian crude oil to justify a release of millions of barrels of oil from US government stocks, a former Obama energy adviser said Tuesday.

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"I don't agree with the reimposition of sanctions against Iran, but if you are of the view that we need to take the strictest possible line to crack down on Iran's egregious behavior and we have to take their oil exports to zero ... then I think there is a plausible argument to say that is a legitimate emergency supply disruption that justifies a release from the Strategic Petroleum Reserve," said Jason Bordoff in an interview with S&P Global Platts.

Bordoff, who is now founding director of Columbia University's Center on Global Energy Policy, said that even though the Trump administration's own sanctions may create a global oil supply shock, they would have legal grounds to release as much oil as administration officials deemed necessary from the SPR. They could also determine that the ongoing collapse of Venezuela's oil sector, fluctuating output in Libya or even recent tensions with Saudi Arabia may be enough to justify one or more releases from the SPR in order to address oil market volatility, Bordoff said.

In a paper released Monday, Bordoff and Sam Walsh, a non-resident fellow at the Center on Global Energy Policy, argued that an SPR release was the "most likely tool" for Trump to offset global supply disruptions.

In the paper, Bordoff and Walsh argue that Trump could release as much crude as he wanted without backlash from Congress, since lawmakers have already authorized sales of hundreds of millions of barrels of crude from the SPR.

The only impediment to an SPR release, they argue, is the "aging and outdated US oil infrastructure" needed to move the oil out of the SPR, which includes four sites along the US Gulf Coast.

Limited pipeline capacity, crude oil terminal storage capacity, and marine terminal distribution capacity could all hinder SPR crude from reaching US refiners, they wrote.

It takes 13 days from a presidential decision for SPR crude to enter the US market and the SPR has a maximum nominal drawdown capability of 4.4 million b/d, according to the Department of Energy. But a 2015 analysis by DOE found that 3.75 million b/d of additional marine distribution would be needed to match that rate.

Still, while recent pipeline reversals and congestion in the Gulf may limits the SPR's ability to deliver its full nameplate capacity to the market, an SPR release can still impact prices, said Kevin Book, managing director with ClearView Energy Partners.

"Due to the nature of commodity prices, adding even hundreds of thousands of barrels per day - to say nothing of millions - can take the edge off a tight market," Book said. "Global refiners' limited appetites for incremental light crude could mute headline impacts to benchmarks, but not entirely."

Last month, US Energy Secretary Rick Perry denied that the US was considering an SPR release in response to rising oil prices and said even if SPR crude was released onto the market, it would have a "fairly minor and a short-term impact."

But analysts believe an SPR release is still likely in coming weeks.

"If Brent prices stay elevated above $80, I think it increases the chance that there will be a SPR release," said Joe McMonigle, an analyst with Hedgeye Risk Management and former Department of Energy chief of staff. "We are hovering around $80 now but if they rise especially before the election, we see the chances of a SPR release at close to 60%."

Still, Book with ClearView said that high and rising prices may boost the likelihood of an SPR draw, but the Trump administration may want to use such action as a concession for current importers of Iranian crude, including India and China.

"In the absence of accelerating tightness, we think the White House might want to keep the draw in its pocket to collateralize future cooperation from Iran's existing buyers," Book said.

In a briefing with reporters Tuesday, a senior administration official said that the administration was "pushing countries towards zero [imports of Iranian crude] and we're working with each jurisdiction independently on what that jurisdiction is importing and... what is the path to zero."

-- Brian Scheid, brian.scheid@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com