Strategic oil reserve tapped in first emergency draw since 2012

Half-a-million barrels of US government oil is being released from the Strategic Petroleum Reserve to a Gulf Coast refinery — the first emergency discharge in five years — after storm Harvey halted foreign crude deliveries to the heart of the nation’s refining industry.

 

The crude released to the Phillips 66 refinery will take the form of an exchange, in which the Houston-based company will replace the oil once supplies are flowing again.

 

As many as 11 ports were shut during Harvey’s five-day rampage across hundreds of miles of the Texas coast, leaving 28 tankers laden with more than 18 MMbbl of overseas oil drifting offshore as of Wednesday night, the 30th August.

 

Harvey is straining the fuel-making capacity of the world’s largest economy just as the Trump administration mulls whether to shrink the 40-year-old safety net established to prevent crippling crude shortages.

 

President Donald Trump wants to sell off half the reserve. Last year, Trump’s predecessor Barack Obama asked Congress to auction a fraction of the oil to help fund US$2 billion in upgrades to the 60 underground caverns that hold the crude.

 

The decision by US Energy Secretary Rick Perry authorises 200,000 bbl of sweet crude and 300,000 bbl of sour crude to be drawn from SPR’s West Hackberry site and delivered via pipeline, Jess Szymanski, a spokeswoman for the department, said. The trickle being offloaded from the 679 MMbbl reserve is not yet large enough to impact prices in the broader market, said Gene McGillian, market research manager at Tradition Energy in Stamford, Connecticut.

 

“If we saw a sizable release from the SPR, you would probably see the market come under pressure, but 500,000 bbl, while it could help that refinery, I’m not sure that’s having much of an effect on the market,” Mr McGillian said.

 

Four ports including those in Galveston and Texas City partially have reopened but it was not clear if the restrictions in place would allow tankers to dock. Seven other ports remained closed.

 

Harvey also shuttered about 23% of US refining capacity, with multiple refineries in the Houston, Port Arthur and Beaumont, Texas, areas closed, including the nation’s largest operated by Motiva Enterprises LLC.

 

The storm also led to some flows halted on the Colonial Pipeline, a major transportation source for fuel to the Northeast. Gasoline futures climbed as much as 12% to a 26-month intraday high in New York on the 31st August.

 

The last time the Energy Department authorised an emergency exchange of oil from the reserve was in 2012 during Hurricane Isaac. During that time, Marathon Petroleum Corporation requested an emergency loan of one MMbbl to supplement its supplies to support refining operations, according to the Energy.gov website. Prior to that, exchange agreements also occurred in 2008 during Hurricanes Gustav and Ike.

 

Phillips 66’s Lake Charles, Louisiana, refinery has capacity to process 239,400 bpd, according to data compiled by Bloomberg. In January, the Energy Department accepted a bid by Phillips 66 to buy crude from the reserve, the first sale of government crude since 2014. The sale was the first in a series of planned draw-downs through 2025 totalling almost 190 MMbbl, or 27% of the reserve. A second sale of 10 MMbbl is expected before October.