Selling off parts of the U.S. Strategic Petroleum Reserve to balance the books could backfire if not managed properly, analysts said. File photo by sakhorn/Shutterstock
May 23 (UPI) -- President Donald Trump's plan to sell off strategic oil reserves to balance the budget will take careful planning to avoid hurting oil prices, analysis finds.
Crude oil prices were moving in negative territory early Tuesday on word a White House budget proposal relies in part on selling off parts of the Strategic Petroleum Reserve in an effort to balance the books.
According to a daily emailed newsletter from London broker PVM, selling off half of the 688 million barrels in the SPR could add about $17 billion to federal coffers in the current market. Oil prices moved lower because of the potential supply strain from the sale, though the brokerage report said that, if implemented, Trump's proposal would "not create a worryingly oversupplied situation."
The U.S. government in December, before the start of Trump's first term in office, approved legislation that permitted the sale of 25 million barrels of oil from the SPR over the next three years, with the first sale of 10 million barrels scheduled for late February.
The sale was permitted under the 21st Century Cures Act and the Energy Department said the revenue would go to a general fund to support health innovation projects as designated under the measure.
Pricing group S&P Global Platts reported earlier this year that the volume of crude oil injected into the market from the SPR under the Cures Act would be relatively negligible and the long-term impact on the price for oil should be relatively minor.
Ole Hanson, the head of commodity strategy at SaxoBank, told UPI that if the proposal has enough support to move forward, the sale from the SPR would pay off, but progress would have to be managed carefully so that U.S. oil doesn't flood the market and drag on domestic crude oil prices.
"Over a ten-year period the impact would be limited, while an unlikely fire sale over a few years could have a significant and, for U.S. producers, a counterproductive impact," he said.
Lower crude oil prices would diminish other parts of Trump's policies, namely efforts to tap into Arctic oil reserves. Production there would be cost-prohibitive when compared with the U.S. shale oil basins that have been more resilient to lower crude oil prices than expected.
"Producers big and small are chasing the low hanging fruits across the most prolific shale oil regions," Hansen said.
The International Energy Agency requires member states to hold the equivalent of 90 days of the previous year's imports in reserve. PVM estimates that if import levels hold to recent trends, the SPR would need at least 140 million barrels above what's outlined in the Trump proposal.