Market Reaction to SPR News Overblown

I have been expecting an oversold rally in oil, and yesterday we got one in spades with W&T Offshore, Inc. (WTI) rising nearly 5%. This, apparently, was on news that the United States government will double its strategic petroleum reserves within two decades.

"Doubling the size of the SPR would add significant upward pressure on oil prices,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. "It would remove a significant amount of supply from the market. Refiners will have to spend more to get the available barrels.''

Really?

The plan calls for the SPR capacity to increase from 727 million barrels to 1.5 billion barrels over the next 20 years. The world will consume about 86 million barrels of oil per day in 2007, or 31.39 billion barrels over the course of the year. Assuming no demand growth over the next 20 years (which, of course, is unlikely but we assume so for simplicity sake), total oil demand will approximate 627.8 billion barrels. Thus, demand for the incremental capacity will account for 0.12% of total demand over that time period.

And that's what accounted for the 4.7% increase in the price of WTI yesterday?

Yes, actually, since that is the nature of markets. However, the incremental demand from the SPR will be priced in accordingly over time, and a 4.7% jump in the spot price of oil over a day does not accurately reflect that incremental demand.

Oil rallied because it was oversold, and the SPR news was the excuse. But the chart is broken, and I expect oil to top out in the near future before re-testing the $50 low.

Comments

[oldie383:]

thank you for the sane commentary. Short covering action always produces the seemingly incorrect spurts in stock and commodity prices. Another factor which is behind the scenes but not mentioned because of the "crackpot" factor is the aims of the secret societies. Many of the popular topics which are named "issues" are probably decoys. As with the wooden ones decoys are often more beautiful than the real thing.

2007 Jan 24 10:30 AM