Isaac Seen Making Release of U.S. Strategic Oil Likely

08 28, 2012 by Bloomberg

Rising gasoline prices and production cuts tied to a tropical storm churning through the Gulf of Mexico have some energy analysts predicting the U.S. will announce a release from its Strategic Petroleum Reserve.

Gasoline prices climbed on Aug. 26 to the highest level since May as Tropical Storm Isaac caused evacuation of oil platforms, shutting 78 percent of the Gulf oil output and several refineries. An explosion and fatal fire at the largest refinery in Venezuela may crimp supplies.

“Isaac and the Venezuelan refinery explosion increase the chances that we will have a release from the Strategic Petroleum Reserve,” Whitney Stanco, a Washington-based analyst with Guggenheim Securities LLC, said in a phone interview. The announcement “might happen this week or early next week,” she said.

White House spokesmen have said the administration is monitoring oil markets and that a release is among the actions being considered if prices were to rise or supply was disrupted. Yesterday, spokesman Clark Stevens said that there was no new announcement though “all options are on the table.”

Without a release, gasoline prices may approach $4 a gallon, making them a subject for attack when President Barack Obama faces his presumptive Republican rival Mitt Romney during the presidential debates in October, according to Stephen Schork, president of The Schork Group Inc., an energy consulting firm based in Villanova, Pennsylvania. Obama will probably seek to avoid such criticism, he said.
No Guarantee

“And so the easiest way to do it, for everyone to see, would be releasing barrels” from the Strategic Petroleum Reserve, Schork said in a phone interview. “It has to happen, I think, within the next week.”

Releasing oil from the stockpiles has proven no guarantee of lower prices at the pump over the past eight years. Gasoline went up in the week following the announcements in four out of six cases since 2004. In 2008 and 2011 tapping stockpiles brought down the cost of a fill-up, according to data from AAA. Pump prices increased 0.2 cent to $3.75 a gallon on Aug. 26, the highest level since May 8, according to AAA, the largest U.S. motoring group.

Gasoline prices fell 2 percent in the week after Obama’s release of 30 million barrels last year, done in coordination with 27 other countries belonging to the International Energy Agency.
Monitoring Markets

“The IEA, as always, is actively monitoring oil markets, remains in close communication with its Member countries, and is prepared to act as necessary in response to a physical disruption” Maria van der Hoeven, the executive director of the Paris-based agency, said in a Aug. 24 statement. “At this time the conditions that would warrant such a response by the IEA are not present.”

The organization has declined to comment further since issuing that statement.

Gulf Coast refineries, including those owned by Exxon Mobil Corp. (XOM), Phillips 66 (PSX) and Valero Energy Corp. (VLO), were temporarily shut down as Isaac headed toward the Louisiana coast.
Landfall Predictions

The National Hurricane Center predicted last night that Isaac would go ashore south of New Orleans Aug. 29 with winds peaking at 100 miles per hour. Katrina struck the Gulf Coast on Aug. 29, 2005, causing levees to fail in New Orleans and killing more than 1,800 people.

“The Strategic Petroleum Reserve is established for emergency purposes, related to national security, it is not intended, nor it was never intended, as a buffer against high gasoline prices,” John Hofmeister, an energy-policy writer and analyst who was president of Shell Oil Co. from 2005 to 2008, said in an interview.

Republicans and the oil industry oppose the move and Kenneth Medlock, an energy economist and adjunct professor in the Department of Economics at the Rice University in Houston, said an announcement of a release is unlikely given the criticism it is likely to trigger.

“It creates a point of conflict in terms of politics of the election,” Medlock said in a phone interview yesterday. “You just open the possibility for the engagement of another topic. That won’t necessarily bode well for the administration.”
Romney Plan

Romney said that if elected, he would approve TransCanada Corp. (TRP)’s Keystone XL pipeline and open Atlantic waters to oil exploration.

“When you think about production platforms being evacuated, production being shut-in, you’re talking about a 7 to 10 day event,” said Medlock. “So any upward pressure on price that happens now, it’s going to subside anyway.”

The U.S. reserve, kept in salt caverns along the Gulf of Mexico coast, holds as much as 727 million barrels of crude oil. It was established to counter supply disruptions after the Arab oil embargo of 1973-1974.