Optimizing Crude Oil Sales from Strategic Petroleum Reserves in Asia

Abstract

A joint oil stockpiling facility no more than 3 days sailing from its key markets would be ideally positioned as a Strategic Petroleum Reserve for net importing nations during times of crisis and tight markets. At other times, the facility would have additional value in its capacity to provide an excellent central location for the sale of spot crude for a crude oil marketing company or major producing company. At the same time, the sale of crude oil options to Asian markets can provide a secure and reliable source of supply during times of volatility and enhance a major producing company’s market share in the region. Spot crude oil and product sales from a joint oil stockpiling facility would be able reach tight markets in a few days, and in fact would be available for pick-up in variable quantities that are appropriate for specific market disruptions. As a result, the sale of spot crude oil spread options would have the potential to address sporadic and unanticipated increases in demand without adding undue downward pressure to regional oil prices. The case study develops a model to price the sale of crude oil spread options to China from a hypothetical joint oil stockpiling facility in Northeast Asia over a 15-year period from 2016 to 2030.