Goldman sees OPEC cut dwarfing U.S. oil sale, if it occurs at all

By Sharon Cho on 5/25/2017

SINGAPORE (Bloomberg) -- OPEC can rest easy even on the off chance that Donald Trump’s plan to sell U.S. oil reserves comes to fruition, according to Goldman Sachs Group Inc.

Potential sales from a bid to cut the U.S. Strategic Petroleum Reserve by more than half over the next decade would be “negligible” relative to the size of OPEC’s output curbs and the global oil market, the bank said in a May 23 report. Instead, it would strain logistics on the Gulf Coast where most of emergency stockpiles are located, Goldman said, adding that there’s “high uncertainty on whether such a measure will be adopted.”

Goldman’s view is in contrast to some analysts who predict that the potential sales may undermine efforts by the Organization of the Petroleum Exporting Countries and its allies to shrink a global glut and prop up prices. OPEC and other nations are gathering in Vienna this week to decide whether to prolong a six-month output-cut deal beyond June. Futures in New York rose for a sixth day, trading near a one-month high.

“Impact locally would likely prove more important than on the global market, given the sharp ramp up in U.S. drilling and the steady production growth we expect will require new infrastructure capacity, from moving oil to the coasts to increasing exports,” Goldman analyst Damien Courvalin wrote in the report.

The plan to sell 270 MMbbl of oil, part of the U.S. president’s budget proposal to cut national debt, suggests the reduction will be in addition to the 185 MMbbl of SPR sales already approved by law, bringing the total stockpile volume down to 260 MMbbl from the current 685 million, according to Goldman.

That means such sales would only average 110,000 bpd annually through 2027, 66,000 bpd in 2018-2020 and just 25,000 bpd this year, Goldman estimates.

These volumes are “small when put into the context of the size of the oil market and the current OPEC cuts,” Courvalin wrote. He estimates the size of global oil market at 98 MMbpd and OPEC curbs at 1.7 MMbpd.

From a fiscal perspective, the proceeds stay dependent on the oil price forecast, with the proposal being inconsistent with the Energy Information Administration’s long term price projections, according to Goldman.

While the ramp-up of U.S. shale production is already beginning to impact domestic crude prices, all SPR facilities are located on the U.S. Gulf Coast, meaning these sales may “exacerbate the strains” on Gulf Coast logistics and ability to process and export crude, the analysts wrote.

The SPR, established in the wake of the Arab oil embargo of the 1970s, is the world’s largest supply of emergency crude oil. It contains oil in salt caverns and tanks at designated locations in Texas and Louisiana, which allow for distribution when natural disasters or unplanned incidents occur.

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