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UPDATE 2-U.S. to replace SPR oil it sold in 2014

Fri Mar 13, 2015 8:35pm GMT

(Adds background, quote from DOE spokeswoman)

WASHINGTON, March 13 (Reuters) - The U.S. government on Friday proposed buying buy up to 5 million barrels of sweet crude for the Strategic Petroleum Reserve to replace oil it sold in a test sale last year.

In March 2014, the Department of Energy astonished oil markets with a test sale of 5 million barrels, which some observers saw as a subtle message to Russia after its aggression in Ukraine.

Friday's plan to buy back the oil was another surprise for markets as a drop in U.S. crude imports in recent years has led to calls to reduce the size of the emergency reserve. But the government is required by law to replace the oil withdrawn from the SPR within one year.

With U.S. oil prices at less than half of what they were last year, the DOE has been able to use funds from last year's sale to bolster its defenses against unexpected fuel shortages.

Late last year the DOE used some of the funds from the sale to establish the first-ever U.S. gasoline reserve in the Northeast "in order to address some of the resiliency needs in the region made evident by Superstorm Sandy in 2012," a DOE spokeswoman said.

With the remaining funds, the department is buying back the crude oil.

An energy consultant said the plan signaled the government could expect higher prices soon. "When the government starts buying crude oil, it's signaling that they're picking a bottom for the market," said Carl Larry, director of business development at Frost & Sullivan. "This has to be more of a financial play."

Washington set up the Strategic Petroleum Reserve after the Arab oil embargo of the 1970s.

As the United States enjoys more than five years of a oil boom while crude imports drop, the Obama administration is considering reducing the size of the emergency reserve. A federal energy review, to be released in coming weeks, is expected to include details of an SPR makeover, as part of a broader energy infrastructure overhaul.

The Department of Energy will buy the sweet oil for delivery between June 1 and July 31 and expects to be able to accommodate some early deliveries during May. (Reporting by Timothy Gardner and Valerie Volcovici and Catherine Ngai in New York; Editing by Chizu Nomiyama, Jonathan Oatis and Leslie Adler)

http://af.reuters.com/article/energyOilNews/idAFL1N0WF1VI20150313