"JP Morgan, Koch, Other Oil Traders May Buy Discounted Strategic Petroleum Reserve Oil And Simply Store It"
To stem supply disruptions from Libya and to disrupt the grip of nonconsumer oil speculators, the U.S. Department of Energy announced the sale of 30 million barrels of crude as part of the International Energy Agency’s effort to release 60 million barrels into the global oil market. The sale of oil from the Strategic Petroleum Reserve, as well as the suggestion from the Obama administration that more sales could be announced in the future, has already lowered the price of crude. As the Baker Institute’s Amy Myers Jaffe has noted, the release sends a “signal that should keep rampant speculation at bay.”
However, as Bloomberg reported last week, “some of the oil being released from the U.S. Strategic Petroleum Reserve to bring down prices may be held by traders for later sale rather than sent directly to refiners for processing into gasoline or other fuels.” Some of the purchasers have claimed that they will immediately refine the SPR crude. But many banks and large oil speculators looking to purchase the oil may intend to simply hoard it:
Representatives of trading companies including JPMorgan Chase & Co., Morgan Stanley (MS), Hess Trading Company and Koch Supply & Trading LP joined Valero Energy Corp. (VLO) and Statoil ASA in questioning Energy Department officials June 28 about shipping options and requests for waivers of the Jones Act.
The Jones Act “restricts the shipment of goods between U.S. ports to American-flagged vessels.” Because most oil tankers are foreign-flagged ships, the traders looking to store in the oil offshore must request Jones Act waivers.
Argus Media reports that Koch Industries has already shown interest in leasing super tankers for storage of crude in the Gulf of Mexico. The Economist points out that the small rebound in oil prices have already provided an incentive for oil traders to store, rather than refine, the oil: “If a trader was able to purchase West Texas Intermediate—the oil held in America’s Strategic Petroleum Reserve (SPR)—at the spot price on June 24th, they would already be sitting on a tidy profit.”
In December 2008, when oil prices crashed from a record high to $33 a barrel, speculators with the capability to store massive quantities of crude oil bought in bulk and stored the oil for later sale. As Fortune magazine reported, the rush to store oil instead of refining it pushed prices for consumers back up. Now, the contango — a market situation when the spot price is much lower than the future price of oil — is less significant than back in 2008.
Nevertheless, its not clear what oil traders will do. In Europe and Japan, much of the oil released as part of the IEA effort was sent directly to industry. In the U.S., the release was entirely crude with less strings attached. “Our inventories are in good shape and our markets are well supplied here in the United States,” Rayola Dougher, an economic adviser with the American Petroleum Institute, the largest oil lobbying group, told Reuters. “It may be that our refiners are buying it to store up.”