26/03/12
US using swaps to enable SPR refill plan: Wright
US using swaps to enable SPR refill plan: Wright
Washington, 12 March (Argus) — President Donald Trump's administration will use
"swaps" to more than offset the effects of a 172mn bl emergency drawdown of
crude from the US Strategic Petroleum Reserve (SPR), US energy secretary Chris
Wright said. The swaps arrangement, details of which have not been released,
will allow the administration to add 200mn bl of crude back into the SPR within
the next year at "no cost to taxpayers", Wright said. The proposal would take
advantage of backwardation in the oil market to sell crude in the coming months
at a high price, in exchange for the purchase of more crude in the future at a
lower price. "As we release this oil to address the short-term needs, we're
doing it in swaps," Wright said on Thursday in an interview on CNBC. "So we're
going to release the 172mn bl and swap it for more than 200mn bl that will be
back in the reserve within a year." Nymex WTI crude futures on Thursday
afternoon were trading at $96/bl for delivery in April, compared with $71/bl for
delivery in April 2027. Wright said because the front-month price is higher than
the price in a year, a swap would allow the administration to refill the SPR
with more crude than is being drawn down through the emergency sale. It remains
unclear if the US Department of Energy (DOE) has already entered into swaps
contracts, or if Wright was speaking in generic terms about market pricing. On
Wednesday, Wright said the US had "arranged" to replace the 172mn bl with 200mn
bl. DOE historically uses a competitive sales process for emergency drawdowns,
under which crude being sold from the SPR is sold to the highest bidder in a
public process. DOE did not respond to multiple requests for comment. It remains
unclear what authority DOE could cite to enter into a swap. Under former
president Joe Biden's administration, DOE used the proceeds from an emergency
sale of 180mn bl of crude, sold at an average price of around $95/bl, to
purchase nearly 60mn bl of crude and pay to cancel 140mn bl of congressional
mandated crude sales. That arrangement did not use any swaps, but instead used
competitive sales and purchases. Beyond refilling the SPR, an arrangement that
locks in future prices would also create a price signal that results in oil
companies taking steps to increase production, Employ America managing director
of policy implementation Arnab Datta said. Having a price signal now would
encourage near-term investments in additional output. "It takes six, nine, 12
months to get these shale operations running," said Datta, whose think tank
supports using the SPR to moderate petroleum price shocks. By Chris Knight Send
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