United States plan to sell oil reserve shows declining import needs

Oil prices settled a bit higher on Tuesday as expectations of an extension to OPEC-led supply cuts overshadowed a White House proposal to sell half of USA petroleum reserves.

Crude oil prices closed on their highs recapturing the 51.45 level, and poised to test target resistance near the 50-day moving average at 51.98.

The Strategic Petroleum Reserve is the world's largest stockpile of emergency crude oil, and lies near the largest USA refiners and pipeline networks in four large salt caverns in Louisiana and Texas.

Just last week reports stated Saudi Arabia, the global swing producer and de facto OPEC leader, agreed with Russian Federation to extend the cuts by nine months and hopes to implement this agreement across the organization when they meet in Vienna.

The Organization of the Petroleum Exporting Countries meets formally in Vienna on Thursday to consider whether to prolong the deal reached in December in which OPEC and 11 non-members agreed to cut output by about 1.8 million barrels per day in the first half of 2017.

Meanwhile, oil prices briefly saw a pull back following news early Tuesday of the 2018 USA budget proposal, which includes the sale of almost half of the U.S.'s strategic reserves over the course of 10 years.

BMI Research said the OPEC-led cuts would only result in a balanced market this year, but that from 2018 onward markets would return to oversupply, albeit at a lower level than 2013-2016.

"We are in agreement with the kingdom (of Saudi Arabia).to continue the production cut" for another nine months, Jabbar al-Luaybi told a news conference in Baghdad alongside the Saudi energy minister, Khalid al-Falih. Official Opec data suggested that Opec cut oil output in April by more than pledged.

As part of his proposed budget, he called Tuesday for the sale of half of the country's strategic oil reserves, which stands at 688 million barrels.

Over the next decade, the administration says that cutting the reserve by half would bring in about $16 billion, money that would go directly to reducing the federal deficit. Saudi Arabia, which holds the current OPEC presidency, will also attend.

"They are not major producers, but their move could have a psychological impact on the global oil market", he said.

"This is the common Wednesday morning consolidation we see before the release of the weekly statistics", Thomas Finlon, director of Energy Analytics Group in Wellington, Florida, said by telephone. "In order to clear that crude, find a home for it, it has to be discounted".

"This (stocks decline) is a bit tricky as production cuts cause higher prices which will incentivize more production for the US shale oil and reduce the impact of the production cuts". Higher long-term prices have encouraged producers, especially in the U.S. shale sector, to sell forward and lock in margins, thus making it easier to finance their efforts.

  • Zachary Reyes