The US will sell 5 million barrels of sour crude from its Strategic Petroleum Reserve as part of a test sale to evaluate its ability to distribute oil in the event of an emergency, the Department of Energy said Wednesday in a Notice of Sale.
The DOE said it will accept bids for the crude until 2 pm CDT (1900 GMT) Friday and will inform all successful and unsuccessful bidders within a week.
The crude will be for deliveries over a 30-day period, April 1-30, though "requests for early delivery in March ... are encouraged and will be accommodated to the maximum extent possible," the agency said.
The DOE said it will not sell the oil for less than 95% of market prices for comparable crude being sold in the same area, with the Argus assessment of Southern Green Canyon crude serving as the price index for comparison purposes.
On Tuesday, Platts assessed the spot price for Southern Green Canyon at $99.88/b or April WTI plus 15 cents/b.
The DOE added that it expects the sale to have "minimal market impact."
"The department has been discussing this internally for many months, and the Notice of Sale is being issued today so refineries interested in purchasing crude oil from the SPR can plan accordingly for when their facilities come out of their annual maintenance cycle at Gulf Coast refineries when crude oil stocks are being replenished in preparation for switchover to summer grade gasoline," the DOE said.
DOE spokesman Bill Gibbons said the agency is required by law to continually evaluate the SPR's system drawdown capabilities and sales procedures. The DOE manages the SPR, which currently holds 695.9 million barrels and is the largest government stockpile of crude in the world.
"Due to the recent dramatic increase in domestic crude oil production, significant changes in the system have occurred -- including pipeline expansion, construction of new infrastructure, reversed flow of existing pipelines and increased use of domestic crude oil terminals," Gibbons said in a statement.
"In order to appropriately assess the system's capabilities in the event of a disruption, today the Department of Energy authorized a test drawdown and sale of up to 5 million barrels of sour crude oil."
The SPR is a series of underground caverns with the capacity to hold 727 million barrels of crude. The last sale from the SPR came in 2011, when the DOE offered 30 million barrels as part of a coordinated release by International Energy Agency member countries to counter the disruption caused by Libya's civil war.
The most recent test sales occurred in 1990, when 4 million barrels were sold, and in 1985, when 1 million barrels were sold.
Of the crude being offered Wednesday, 4 million barrels will come from the SPR's West Hackberry site and 1 million barrels from the Big Hill site.
The effect of the sale of 5 million barrels of sour crude Wednesday morning was already being felt in early trade, with Mars -- the benchmark for sour crudes on the Gulf Coast -- heard offered at WTI plus 50 cents/b, down from Tuesday's assessment of WTI plus 95 cents/b.
The market for SGC was heard lower early Wednesday, as well, with bids for the sour crude pulled back to $1.65/b below Mars, after trading Tuesday at an 80 cents/b discount to Mars and then was last heard bid at $1/b under Mars.
Despite the lower market on Wednesday, US crude sources said that they believe that the effect of SPR sale will be shortlived.
Many US crude sources questioned the timing of the sale.
"The Gulf Coast market has plenty of barrels," one trader said. "They should have done it a few weeks ago when the Gulf Coast was tight due to all the weather delays."
