Thursday, June 30, 2011

Offers pile up to buy reserve crude

Strategic Petroleum Reserve


WASHINGTON — The government's auction of 30 million barrels of oil from the United States' emergency stockpile attracted more than 90 offers to buy the crude, the Energy Department announced Thursday.

Industry interest in the Strategic Petroleum Reserve oil was so high that the auction was "substantially oversubscribed," the department said, meaning bidders offered to buy more oil than is available.

Bids for the emergency oil were due Wednesday afternoon, and the government anticipates it will complete final contract awards by July 11.

The government did not say who placed bids for the light low-sulfur crude or what offers were deemed successful. But in an Energy Department conference call on the sale earlier this week, traders were seeking information along with refiners, signaling that some of the crude may not be headed immediately to refineries.

Successful bidders are permitted to store oil for later use or resale but may not export any of the stockpiled crude unless they return an equal volume of refined product to the U.S.

The flood of offers for the emergency oil surprised some market analysts, because the sale comes at a time when U.S. inventories are near record levels.

Storage tanks are full in part because of bottlenecks at a major oil hub in Cushing, Okla., which recently has begun receiving more Canadian crude via pipeline and more domestic crude from U.S. fields, including the Bakken Shale formation in North Dakota.

David Pursell, managing director of Houston-based investment bank Tudor, Pickering, Holt & Co., said the surge of would-be buyers could be a sign traders are bullish that oil prices will climb or that refiners are concerned about the availability of the light, sweet crude they prefer.

"The current market data says we're OK - we've got plenty of crude in inventory - and prices have been coming down, even before the release was announced," Pursell said. "So it didn't feel like there was a panic."

But, he added, there may be fear that supplies could tighten, especially if Saudi Arabia isn't able to ramp up its production as quickly as planned.

Although bids were not disclosed Thursday, the cost of the emergency oil is indexed to Light Louisiana Sweet crude prices, which are provided by Petroleum Argus, and have been around $112 per barrel.

Contracts for August delivery of the U.S. benchmark, the lower quality West Texas Intermediate crude, rose 65 cents to $95.42 in trading Thursday.

The Obama administration announced last week it was releasing from the Strategic Petroleum Reserve half of the 60 million barrels that the U.S. and the International Energy Agency's other 27 member nation's committed to put on the market.

Administration officials said the move was essential to restoring stability to the market and offsetting the loss of 1.5 million barrels of high-quality light, sweet crude oil daily from strife-torn Libya during the summer driving season.

Politically motivated?

But Republican critics have assailed the decision as unwise and politically motivated.

On Thursday, U.S. Rep. Pete Olson of Sugar Land and five other Texas Republicans were among 26 GOP lawmakers who blasted the move as evidence that U.S. energy policy is off track.

"Current high pump prices are hurting families, businesses and the economy, but politics should not guide a decision to use a national security asset to address the problem," the lawmakers said. "The best solution to our nation's energy problem is to adopt federal regulatory and approval processes that promote the safe and efficient development of our vast American resources."

The lawmakers also insisted that the administration explain how it plans to replace the released oil.

Disputed program

The Interior Department last year ended a controversial program that allowed companies to give the U.S. actual crude - instead of cash - to pay royalties for drilling on federal land. That royalty-in-kind program had been used to supply the reserve in the past but had been criticized for mismanagement and poor accounting practices.

The high demand for the reserve oil stands in contrast to a lackluster response to the last Strategic Petroleum Reserve auction. After Hurricane Katrina damaged pipelines, offshore rigs and refineries in 2005, the U.S planned to sell 30 million barrels of crude from the reserve, but ultimately auctioned off just 11 million barrels.

Winning bidders of the SPR oil must arrange for transport of the crude to tankers, onshore storage or refineries.

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