Navarik Market Update

May 25, 2017


The Trump Administration’s 2018 budget indicated a sizeable draw down on the Strategic Petroleum Reserve (SPR), the world’s largest emergency crude storage system designed to ensure a readily accessible flow of crude in the case of a supply shock like in 1973-74. The US economy as a whole is continually less dependent on oil, and accordingly the supply-support rationale for the SPR has weakened amid accusations that it simply inflates prices for end users. This may be what prompted the policy change, but this also introduces its biggest risks.

Although the White House has suggested it will cut the SPR in half, this is below the current legal minimum of 450M barrels. Depending on which measure determines the new floor of the SPR, when the sell-off begins, and how long it lasts, this could dump just a few hundred thousand barrels of crude a day on the domestic market in FY 2018 and only rise as late as 2021. With current OPEC cuts amounting to 1.7 million, global crude inventories could be considerably reduced by the time these barrels hit market, meaning although they might soften the increase in crude prices over the medium- to long-term, it likely won’t prolong the current low price environment.

However, with consumer demand generally expected to remain tepid and markets able to price-in the foreseen release of the SPR barrels, petroleum prices could stay lower than OPEC expects. If they do, this reduces the amount the US federal government stands to make and could also create a disincentive for investment in US medium- to high-cost oil projects, but would benefit US consumers and the wider economy. If prices rise as OPEC hopes, however, the federal government stands to make more money, and also allows other high-cost producers such as the Canadian Oil Sands the chance to stay competitive in the US feedstock market.

Either way, the global crude stand-off will continue and Navarik Data is uniquely placed to offer insights on when, where, and how these developments will disrupt the clean product import/export market.

Further Reading:
Bloomberg, May 22 2017
EIA, May 23 2017
BOE Report, May 24 2017

 

Figure 1

Source: International Energy Agency

Figure 2

 

Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.

To reach a Navarik Oil & Gas analyst email tradeflow@navarik.com. To reach Colin directly call 778-327-6917 or email cmccann@navarik.com.

A list of current available trade flow reports can be found here.

 

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