Falling oil prices Tuesday. Oil prices fell Tuesday on the back of a plan by US President Donald Trump. The White House announced a plan to sell off half of America’s oil reserves. This would create a glut on the market at a time when OPEC members and allies are cutting production in order to maintain prices.
By tightening the market, OPEC and Russia had hoped to reduce the amount of crude on the market. This would naturally lead to falling oil prices stabilizing or perhaps even increasing slightly. Brent light crude had been running four days of gains, then dropped 36 cents Tuesday morning to $53.51. US light crude dropped 33 cents to $50.80 per barrel.
News came out of a White House announcement of a plan to sell off 50% of the country’s 688 million barrel stockpile between 2018 and 2027. This is intended to rise $16.5 billion to help balance the nation’s budget. A major effect of this would be a sudden influx of crude oil onto the market with a consequent drop in price. The budget will be announced to Congress Tuesday. However, it is currently only a proposal, and may be changed before enactment.
The plan would require Congress approval, and it is not certain that this would be forthcoming. The oil market is already in an unstable state. OPEC and Russia are cutting back on oil production and the US is intent on increasing production in spite of its large oil stockpile. Rusdsia and OPEC are trying to recover falling oil prices while the US action would possible accelerate the drop.
As we reported earlier, OPEC and other oil producers expect to agree to continue cutting oil output until March 2018. By releasing half its strategic oil reserves, the US could undermine this attempt to end the glut and lead to even further oil price reductions. OPEC has pledged to reduce output by 1.8 million barrels per day. It is not certain that OPEC countries will be unanimous in the decision to continue. Kuwait indicated that not all countries involved may agree to do so for another nine months.
OPEC meets on Thursday May 25 to discuss and come to a decision on the continuation of the cuts – by either another six or nine months. Some favor the shorter period, but the majority appear to be going for a nine month extension.
Oystein Berentsen is the managing director of the Singapore-based oil trading company Strong Petroleum. He commented that Trump’s proposal was a surprising one. However, to put the issue in perspective, he believes that the sale of American oil reserves may not have much of an effect. It would put only an additional 95,000 barrels per day onto the market. That assumes that the sale is carried out over the nine-year period indicated.
However, by releasing oil reserves, the US would effectively increase its oil production figure even higher than it is now. The current level is 9.3 billion barrels per day. This figure is now close to that of Saudi Arabia and Russia, the world’s top two oil producing countries. The Goldman Sachs warning of “risks for a renewed surplus later next year if OPEC and Russia’s production rises to their expanding capacity and shale grows at an unbridled rate” would be even more dire with the US stockpile sell-off.
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