If US President Donald Trump can’t persuade Opec to raise production, he still has the Strategic Petroleum Reserve (SPR) to call on.
Flooding markets with America’s emergency crude stockpiles may give US consumers some temporary relief at the pumps but it would be a risky and unorthodox strategy, even for a politician with a reputation for disregarding convention.
Stored in salt caverns around the Gulf of Mexico and holding 660 million barrels, the SPR is the world’s largest backup hoard of crude. Established in the wake of the Arab oil embargo of 1973, the reserve has been released 19 times, according to the Department of Energy (DOE). These drawdowns were mostly a result of supply disruptions and to bring down domestic gasoline prices.
However, draining these caverns to lower oil prices isn’t as straightforward as it sounds for Trump. Federal law allows a president to release up to 30 million barrels from the SPR. In 2011, President Barack Obama authorised 30 million barrel drawdown, but this was part of a coordinated response with the International Energy Agency to supply disruptions caused by the Arab Spring revolts. Oil prices nudging above $81 a barrel hardly constitutes an economic crisis, even if the timing is inconvenient ahead of US mid-term elections.
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“An SPR release may generate bearish headlines, but our research indicates SPR releases are limited in their ability to materially and durably lower gasoline pump prices - Trump's top concern,” said US consultancy Rapidan Energy Group’s Scott Modell.
If Trump loses patience with Opec after his jawboning over high oil prices went unheard, a move to use the SPR would be almost unprecedented.
Although the potential loss of Iranian oil exports because of sanctions could provide some justification, the administration would still be selling emergency crude stockpiles to offset potential supply shortages in foreign markets, not in the US.
"Choosing the earliest possible opportunity afforded by statute would appear to reflect President Donald Trump's concern regarding oil market tightness associated with the reinstatement of Iran oil sanctions," Kevin Book, managing director of ClearView Energy Partners, said in a research note.
Even so, any release like the one the Trump administration may be considering would supply non-US companies with a US government asset in order to protect them, at least partly, from a policy change conceived by the White House. Pursuing such a strategy may be politically savvy with voters, but it would almost certainly draw unwelcome scrutiny from Congress.
“This has not been done before and is not a defined purpose of the SPR,” one administration source told S&P Global Platts. “That said, there is a first time for everything.”
Sanctions on Iran could provide Trump with an excuse to protect the market from disruptions if Opec kingpin Saudi Arabia and Russia can’t step up. S&P Global Platts Analytics forecasts 1.7 million bpd of Iranian crude could be lost as a consequence of the policy, which comes into force in early November.
“If US oil prices breach $80 [currently around $72 on WTI] per barrel and the Trump administration sees a firmer demonstration of Riyadh's inability to cap prices, the odds of an SPR release will be high,” said Mr Modell. However, he believes the administration will still prefer to “keep the power dry on big SPR sales”.
US gasoline prices are hovering near 4-year highs at $2.84 a gallon. Higher gasoline prices have delivered the political kiss of death to the hopes of many American presidents and Trump is unlikely to be an exception to the rule given all the other challenges his administration faces.
Regardless of Trump’s intentions, the SPR is already being drained. The US Department of Energy (DOE) recently sold 11 million barrels of sour crude from the SPR for loading over October and November. The sale is part of a previously announced drawdown for the next fiscal year, which starts in October.
Congress has passed laws requiring DOE to sell about 300 million barrels of crude from the SPR through fiscal 2027. The 11-million-barrel sale is part of two requirements: to draw down 25 million barrels over three consecutive fiscal years starting in 2017 and to sell 58 million barrels over eight consecutive fiscal years starting in 2018.
Grumbling about high oil prices and Opec on Twitter hasn’t worked for Trump, with crude now trading at new four-year highs. However, doing the unthinkable and dumping America’s crude reserves in a deluge would be harder for the market to ignore.
Paul Hickin is associate director for oil at S&P Global Platts.
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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UAE currency: the story behind the money in your pockets
Company profile
Name: Infinite8
Based: Dubai
Launch year: 2017
Number of employees: 90
Sector: Online gaming industry
Funding: $1.2m from a UAE angel investor
Emiratisation at work
Emiratisation was introduced in the UAE more than 10 years ago
It aims to boost the number of citizens in the workforce particularly in the private sector.
Growing the number of Emiratis in the workplace will help the UAE reduce dependence on overseas workers
The Cabinet in December last year, approved a national fund for Emirati jobseekers and guaranteed citizens working in the private sector a comparable pension
President Sheikh Khalifa has described Emiratisation as “a true measure for success”.
During the UAE’s 48th National Day, Sheikh Khalifa named education, entrepreneurship, Emiratisation and space travel among cornerstones of national development
More than 80 per cent of Emiratis work in the federal or local government as per 2017 statistics
The Emiratisation programme includes the creation of 20,000 new jobs for UAE citizens
UAE citizens will be given priority in managerial positions in the government sphere
The purpose is to raise the contribution of UAE nationals in the job market and create a diverse workforce of citizens
