Oil Climbs After 24% Plunge
The Trump administration’s plan to buy millions of barrels of oil for government reserves will target small to mid-size producers that have borne the brunt of the recent market meltdown.
The Energy Department will initially purchase 30 million barrels of sweet and sour crude for delivery in May and June, although requests for earlier deliveries are encouraged, the agency said Thursday. The administration plans to buy as much as 77 million barrels to fill the Strategic Petroleum Reserve, which is “mission-ready” to receive up to 685,000 barrels a day.
The move comes as the U.S. benchmark crude has plunged 66 per cent this year amid a price war between Saudi Arabia and Russia that has squeezed a market already hurting from coronavirus-led demand destruction. Current prices are well below the breakeven price for the biggest American shale fields and threaten to throw smaller, highly indebted producers into bankruptcy.
Officials are moving quickly to help producers facing “potentially catastrophic losses,” Energy Secretary Dan Brouillette said in a statement. He characterized the price war as an “intentional disruption to world oil markets by foreign actors.”
Treasury Secretary Steven Mnuchin called for even greater action to aid American producers on Thursday, saying he will recommend President Donald Trump ask Congress for as much as US$20 billion to keep the Strategic Petroleum Reserve full for a decade. “Let’s go out and buy,” Mnuchin said in a Fox Business Network interview. “Fill up the reserve.”
At today’s prices, US$20 billion could buy more than 800 million barrels of oil -- far exceeding the reserve’s total capacity of 713.5 million barrels. Some 635 million barrels are already stored there, in underground salt caverns along the U.S. Gulf Coast.
The administration’s decision to target smaller producers could benefit mid-sized companies such as Continental Resources Inc., the shale driller owned by billionaire Harold Hamm. Hamm last week said he would file a complaint with the U.S. Department of Commerce against Saudi Arabia for “illegal” dumping of crude and on Thursday said that Senator James Inhofe has asked Commerce to begin a probe under Section 232 of the Trade Expansion Act.
Other producers that have taken a hit from the meltdown, such as Occidental Petroleum Corp., are likely too big to be considered.
Bids are due March 26. Payment for the crude would be issued within 30 days of invoicing, although it was unclear if invoices could be submitted prior to delivery. The agency has not said what funds would be used to purchase the crude, and may need an appropriation from Congress.