FOREIGN REPORTS INC. 818 18TH Street NW, Suite 1050 Washington, D.C. 20006 Tel: 202-785-4574 Fax: 202-785-5370 BULLETIN June 23, 2011 THE SPR RELEASE TODAY AND THE 2000 RELEASE Both the IEA and the U.S. Department of Energy announcements on the planned release of a combined 60 million barrels of oil from strategic stocks emphasized cooperation with major producing countries. President Obama has similarly emphasized cooperation with producers since March 11, when, during an “energy” press conference, he first said that plans for an SPR release were all “teed up”. In the last comparable SPR release, in September 2000, Saudi Arabia‟s position on the release evolved over several days, especially as an OPEC Summit was held in Caracas three days later. The 2000 release was announced six weeks prior to a close presidential election. The IEA said today that it “warmly welcomes the announced intentions to increase production by major oil producing countries” but claimed that such an increase “will inevitably take time.” “The IEA collective action is intended to complement expected increases in output by these producing countries, to help bridge the gap until sufficient additional oil from them reaches global markets,” the Agency said today. U.S. Energy Secretary Steven Chu, in a statement, said: “The decision today is intended to complement the production increases recently announced by a number of major oil producing countries. The United States welcomes those commitments and encourages other countries to follow suit.” He noted the U.S. had been “in close contact” with producers. May 14 Meeting in Riyadh Saudi Oil Minister Ali Naimi received a sub-cabinet level group from the Obama Administration on May 14, led by White House deputy national security adviser Michael Froman and Deputy Energy Secretary Dan Poneman. to discuss different options for dealing with oil price levels which the Administration believed were harmful to the U.S. and world economic prospects. President Obama had called King Abdullah on May 11. Foreign Reports Bulletin June 23, 2011 THE SPR RELEASE TODAY AND THE 2000 RELEASE Page 2 The consultations with Minister Naimi followed a general pattern set in September 2000, when the Clinton Administration announced the release of 30 million barrels from the SPR. Early that September, U.S. officials had discussions about the SPR with Minister Naimi in New York and Los Angeles. The Clinton Administration announced the release after markets had closed on Friday, September 22, 2000. At that time, the Administration said it would reassess the market after 30 days to see if another 30 million barrels should be released. June 14 Telephone Conversation Last week, on June 14, President Obama again called King Abdullah. The call was made in the aftermath of the June 8 OPEC meeting. Analysts from major banks with vested interests in attracting investment flows into their commodity funds had interpreted the outcome of the OPEC meeting as bullish for oil prices. Also on June 8, President Obama cited the disruption of supplies from Libya as a reason for releasing stocks from the SPR. “My general view has been that the strategic petroleum reserve is to be used when you don‟t have just short term fluctuations in the market, but where you have a disruption,” the Huffington Post quoted Obama as saying. “Libya has taken 125 million barrels off the market. We‟re examining broadly what that means in terms of the oil market.” Both the IEA and the DOE statements today cited the disruption of Libyan supplies as a prime reason for the release of stocks. Heating Oil Cited in 2000 In 2000, the Clinton Administration cited low levels of heating oil stocks as the prime reason for its announcement of an SPR release. “Portland, Maine, will be in the 50s next week. So will Minneapolis. And it snowed in the Rockies yesterday,” Secretary of Energy Bill Richardson told a press conference when announcing the SPR release. “We need to make sure that American families keep warm this winter and get their heating oil. The president will do everything within the power of the federal government to ensure that Americans have the fuel they need to heat their homes.” In the run-up to the 2000 SPR decision, there was dissension within the Clinton Administration. Dow Jones reported at the time: “Treasury Secretary Lawrence Summers wrote a memo Sept. 13 in which he said such a move would be a policy blunder that would discredit the entire concept of holding oil in reserve for a national emergency. Summers said that Federal Reserve Board Chairman Alan Greenspan shared his views. However, Summers quickly changed his tune once it was clear the White House would go forward with the decision regardless of the policy implications and said a limited release wouldn't be all that bad.” Vice President Gore had been making public and private pleas for an SPR release such that prices fell during the two trading days prior to the formal announcement of the release. As it turned out, sunny Florida became the deciding contest in the 2000 election. Foreign Reports Bulletin June 23, 2011 THE SPR RELEASE TODAY AND THE 2000 RELEASE Page 3 OPEC Summit in Caracas The 2000 release announcement came just before an OPEC summit meeting convened in Caracas on September 25. On his arrival in Caracas, wire services reported that Naimi expressed understanding of the release. “The SPR release will stabilize the price of oil,” he said. “We have already said that that is a decision for the U.S. to make.” Also on September 25, Saudi Ambassador to Washington Prince Bandar bin Sultan called the SPR release a “positive move” if it helped “stabilize the oil markets within the price range of $22 and $28.” He also termed the SPR release “an internal decision by the U.S. which does not concern Saudi Arabia.” Kuwaiti Oil Minister Saud Nasser al-Sabah took the same position. Crown Prince Abdullah Address to Summit In his address to the OPEC Summit on September 28, then-Crown Prince Abdullah stated: “The Kingdom of Saudi Arabia is ready, whenever needed, to produce the quantity required for the stability of the oil market.” He had prefaced those remarks with a reference to price volatility. “As much as we were concerned about the plummeting of oil prices two years ago causing considerable damage to our economies and the world oil industry, and leading to exceptional efforts on OPEC part to restore stability in the market, we are equally concerned now at the increasing level of prices that could have a negative impact on the role of oil worldwide and the prospects of international economic growth.” The September 2000 release followed three OPEC meetings held that year during which the Organization raised quotas by over 3 million b/d. In spite of the production increase, prices had moved well above OPEC‟s then-current $22-28 price band. “No Harm” In a September 29, 2000 interview with Platts, Middle East Economic Survey, Business Week, and Petroleum Argus, Minister Naimi said that there was “no harm” in the SPR release if it served the objectives of OPEC‟s price band. “Naimi,” Platts reported, “said the decision by the US, the world‟s largest oil consumer, to release 30-mil bbl of crude from its Strategic Petroleum Reserve was motivated by the same desire to moderate prices that has driven OPEC to increase output three times this year already. „The fact that additional crude supply is coming from reserves outside of major OPEC producers or major producers, that really falls in the same trend or objective of trying to moderate the price, and as long as that‟s what it will do and as long as the price stays (within OPEC's target range of $22-28/bbl), there is really no harm.‟ [Naimi] said.” The actual price impact on the 2000 release may have been to stem a persistent price rise that occurred despite the OPEC production increases, but prices were also subject to new geopolitical uncertainties in the Middle East, attributable both to an Foreign Reports Bulletin June 23, 2011 THE SPR RELEASE TODAY AND THE 2000 RELEASE Page 4 aggressive move by Israel‟s Ariel Sharon to visit the Haram al-Sharif in Jerusalem, which Palestinians claimed sparked the second intifada. In addition, Saddam Hussein regularly threatened to halt oil sales under the oil-for-food deal. WTI PRICE BEHAVIOR IN LATE 2000 Foreign Reports Bulletin June 23, 2011 THE SPR RELEASE TODAY AND THE 2000 RELEASE Page 5 Importance of Backwardation One salient feature of the 2000 release was the steep backwardation of WTI crude at that time, with the near month trading at times at a 25% premium to barrels for delivery a year later. This made it possible to arrange the SPR release as a time swap, where bidders proposed how many more barrels they would return back to the SPR a year after the release. On average, 108 barrels were returned for every 100 barrels swapped out. According to testimony by DOE Undersecretary Ernest Moniz to the Senate Energy Committee on October 19, 2000, the steep backwardation was the key factor in the swap. “The market conditions under which an exchange works, a steep backwardation curve in which current prices are much higher than future prices, were precisely what we saw in September,” Moniz testified. “Few credible market analysts would dispute the fact that high backwardation curves have discouraged the holding of both crude and heating oil inventories. Fewer still would dispute the fact that the lowering of this curve will encourage the building of both crude and distillate inventories, and that is, in fact, happened—the backwardation curve being reduced.” Moniz asserted that the results of the 2000 release were indisputable.