* G8 to discuss oil market strains at Camp David
* G8 could say it’s prepared to use oil reserves
* Iran oil exports have fallen by a fifth this year
(Adds Hollande comment in para 5)
By Timothy Gardner and Jonathan Leff
WASHINGTON/NEW YORK, May 18 (Reuters) – Late last year, Iran
issued a series of not-so veiled threats to the West, suggesting
it could use its “oil weapon” to show displeasure over
toughening sanctions by halting exports or disrupting the Strait
of Hormuz.
This weekend, the Group of Eight nations may offer a timely
retort: We’ve got an oil weapon of our own, and we’re not afraid
to use it.
After months of intense but quiet diplomacy with key allies,
U.S. President Barack Obama may secure the support of the G8 to
essentially pre-authorize a release of strategic reserves later
this summer, just as U.S. and European sanctions on Iran come
into force.
G8 leaders at this weekend’s summit at Camp David in
Maryland will discuss a “range of options” to address oil market
strains, Tom Donilon, Obama’s top security aide, told reporters.
The Japanese news agency Kyodo reported on Wed nesday that Obama
would urge leaders to support plans to release reserves. A
diplomat said the topic will likely be part of an energy
discussion on Saturday.
“My position is to use all instruments to lower (oil)
prices,” France’s newly elected Socialist President Francois
Hollande told reporters on Friday, confirming a shift in his
stance since the elections. He said however that the question of
reserves was not raised in his first meeting with Obama.
While leaders are likely to stop short of any hard and fast
commitment to intervene in the oil market, the talks will show
that this month’s slump in oil prices hasn’t deterred Obama from
moving toward tapping the Strategic Petroleum Reserve (SPR)
again – an unprecedented second release for a U.S. president.
U.S. crude oil has tumbled 12 percent this month,
dropping to the lowest since before a November U.N. report on
Iran’s atomic program which kindled global fears.
Obama’s focus on the SPR carries risks: Republicans will
blast the White House for using a national security tool to buy
votes; Saudi Arabia and other OPEC allies may cry foul for
having their market-balancing role usurped; and some consumer
nations, like Germany, have resisted suggestions of using
stockpiles.
“Last year, the president released 30 million barrels of the
reserve to manipulate oil prices and has yet to refill it.
Releasing even more this year only lessens our buffer and
protection when a true crisis hits,” said Senator David Vitter,
a Republican from Louisiana.
And it may do little to affect oil prices in the short-term:
Analysts say many traders have priced in a likely release, and
that right now, markets are well supplied.
But the message between the lines may ultimately be more
important than the act itself, reinforcing a growing perception
that Obama is leading a fundamental rethink of the strategic
value of government crude.
A YEAR IN THE MAKING
It is a shift that began exactly a year ago, when the
International Energy Agency’s governing board issued a
surprisingly blunt statement warning oil producers that it could
use “all tools at its disposal” if they didn’t increase output
to offset Libya’s war-torn exports. A month later, in June 2011,
the IEA announced a plan to release 60 million barrels, the
biggest coordinated oil sale in its history.
This year’s discussion would go further, using reserves as
an affirmative policy tool rather than a supply of last resort,
some analysts have suggested.
In the case of Iran, consumer nations could plan to
preemptively fill any supply loss before it occurs, allowing
them to amp up pressure on Tehran without inflicting further
damage on their fragile economies.
“I think there is a debate globally on when and how to use
strategic stocks, and there are lessons being learned in that
regard, including whether a joint IEA approach is required,”
says Ed Morse, global head of commodities research at Citigroup
and a former energy expert at the State Department.
Any war of “oil weapons” would be asymmetrical: The SPR
would run out of oil within a year if it were forced to
compensate for all of Iran’s 2.2 million barrels per day of
exports. But signaling a more liberal approach to the SPR will
keep oil traders – and Iran – on edge.
Britain and France have indicated their support for
releasing stocks, according to diplomats. Germany, the EU and
the head of the IEA have voiced reservations, maintaining the
strict interpretation that such reserves are to be used only in
the event of a major supply disruption – for which no precise
threshold has been set.
“I think it’s fair to say that there is an ongoing
reevaluation and it is likely to be accelerated if only because
the SPR is becoming increasingly unusable,” said Morse.
The unexpected surge in U.S. shale oil production in North
Dakota and Texas is expected to dramatically reduce demand for
imported sweet crude in the Gulf Coast, where the caverns
holding the Strategic Petroleum Reserve are located. Almost half
those caverns hold the same type of light, sweet crude.
NOT A FOREGONE CONCLUSION
The timing of this weekend’s discussion is precise: World
powers are due to hold a second round of nuclear talks with
Tehran in Baghdad on May 23. The United States says Iran’s
nuclear program is a cover for developing the capability to
build atomic bombs, while Iran says it is for civilian purposes.
“My guess is the G8 will come out with a statement that
‘Should Iran be not be forthcoming, we are prepared to use the
petroleum reserves that are at our disposal,'” said Guy Caruso,
the former head of the Energy Information Administration (EIA).
That would not mean tapping the reserves is a foregone
conclusion. It is unclear yet whether Obama and allies would opt
to wait and see if Iran’s exports fall and prices spike, or move
preemptively to head off a speculative panic that could drive
U.S. gasoline quickly above $4 a gallon.
ClearView Energy Partners says an SPR draw is “more likely
than not” before July 1. Even if OPEC were to pump more crude,
the SPR would not be off the table, they said in a recent
research note.
“For a U.S. politician seeking reelection, getting crude
from ‘all of the above’ may prove to be the most politically
viable strategy,” ClearView’s Kevin Book said in the note,
referring to Obama’s domestic energy policy.
Iran’s exports have fallen by more than a fifth since the
start of the year as European nations abandon contracts and
Asian importers cut back shipments.
And the shipments could be further curtailed in two ways.
Any country that wishes to continue buying Iranian crude
without falling foul of sanctions must gain an exemption by June
28, six months since Obama signed tough new sanctions into law.
Only Japan and 10 European countries have so far won
exemptions, although India this week said it would continue
cutting back over time, without giving a target.
Even if Obama grants more waivers, as is widely expected,
European sanctions that come into full effect on July 1 could
bring exports to a swift halt by blocking access to the critical
London-based tanker insurance market.
Britain is lobbying its fellow EU members for an up to
six-month delay on those provisions, which would ban European
Protection and Indemnity clubs from covering vessels carrying
Iranian crude. Asian importers are lobbying for relief.
Until a decision is made to tap reserves, the price of oil
could remain high.
“Markets at this point have discounted all the political
talk,” said Caruso. “The only thing that would move a market now
would be an actual decision to tap reserves.”
(Additional reporting by Elizabeth Pineau, Editing by
Bernadette Baum and Marguerita Choy)
