Oil prices moved up last week and Libya may have been responsible. Despite the Government claiming to have reached a deal with some of the rebel groups in the oil producing region of Cyrenaica, the market is not especially convinced. Rumors of agreements have been frequent and market pundits believe that the Government will not be able to secure control of exports from oil terminals in Cyrenaica as claimed. One of the main terminals is at Zuetina, capable of handling 200,000 barrels a day (bpd). Meanwhile, in the United States, favorable economic indicators were published, especially as far as the number of new jobs created in March is concerned, which appears to have been higher than expected. This was a positive surprise that may account for the increased price of crude oil. Brent crude traded 1.5% higher, reaching USD$ 106.26/barrel while West Texas crude oil rose by 1.1 percent to $ 100.36 / barrel. The higher oil prices benefit such oil exporters as Russia and Iran, countries the US would rather keep in check, especially in view of a potential deal that would see Iran and Russia sign a potential USD$ 20 billion oil-for-goods deal. Such a deal would fly in the face of the economic noose that the West – or at least the United States – wants to tie around Russia in retaliation for the annexation of Crimea.
In the immediate demand and supply mechanism controlling oil prices, there is not much the US can do to discourage the deal and much less force prices down; unless the US gets into the oil exporting business itself. The US does not export oil by law, given strategic resource conservation laws, but a there has been a debate on starting to sell some of its production or of its strategic oil reserves. Such a sale would depress world prices and make life difficult for big exporters like Russia hard – even though it would also affect allies such as Saudi Arabia. In other words, the US is considering the use of oil as a political weapon. The reserve was created in mid 1970s after the first world oil crisis and currently amounts to almost 700 million barrels. The idea is not new; the Arabs used this to great effect in 1973, though in reverse – the idea being to spike oil prices to hurt the West.
The Crimean crisis and Russia’s efforts to avert the effects of sanctions has prompted the US to consider novel approaches and the sale of oil reserves idea comes on the heels of a previous one where the US would export natural gas across Atlantic to Europe to reduce its allies’ dependence on Russian supplies. The idea comes from George Soros, no friend of Vladimir Putin’s, who suggests for the US Government to throw its strategic oil reserves to the market. The price of oil would fall immediately, which would be very painful for Russian President Vladimir Putin. The US has never been as energy self sufficient as now and its newly developed shale gas stocks open up new perspectives. Over the next two years, the U.S. could easily bring 500000-750000 bpd to the world market, causing the price of oil to drop by USD$ 12/barrel – according to proponents of this plan, while Russia would have to cope with loss of revenue of about $ 40 billion or 4% of Russia’s GDP: in other words it would cause serious harm.
The debate on the export of oil from the United States is likely to drag on for some time, but there are market players eager to circumvent the ban. Oil refiners would export refined oil, such as to be able to call it “refined product” which would legally bypass the crude oil controls and become freely exportable. Meanwhile, legislators would take some legal shortcuts to give international markets access to American oil. Senator Lisa Murkowski (R) has urged the Senate Energy Committee to change the definition of crude oil products in order to recognize them as something other than crude, requiring only a minor technical regulatory change through the Bureau of Industry and Security of the Department of Commerce. Refiners, meanwhile, are eager to get rid of what they call condensate, a sort of ultra-light oil that flows in large quantities from some shale oil areas and in particular those originating in Texas’s Eagle Ford formation (which accounts for half of the output, which is more than 600 thousand barrels per day). The refineries of the Gulf Coast, calibrated to process heavy crude oil, cannot absorb large quantities and some analysts estimate that at the end of the decade in the United States there will be a 2 million bpd surplus of condensate. Last week, Magellan Midstream Partners and Targa Resources announced they would build special plants to handle condensate, having already secured commercial agreements with Trafigura and Noble – some of the largest commodity trading groups in the world.