Oil Sale Smells of Panic

Includes: OIL, USO
by: Igor Greenwald

Thank the Almighty for the Strategic Petroleum Reserve. Up to 30 million barrels of the crude salted away in the salt caverns beneath Louisiana and Texas will get pumped out this summer, adding to plentiful stockpiles of the stuff elsewhere.

The decision to tap the nation’s emergency stash (with a matching drawdown by other importing nations) won’t make much of a dent in energy prices over the medium run. But doing something will help Washington pretend that it still matters.

It certainly mattered to the oil traders Thursday. Brent crude, the global benchmark of choice, slumped 6% to $107 a barrel. It had been stuck near $115, amid worries about the lost Libyan supplies, feared disruptions in Nigeria, and disappointing output from the North Sea.

At a stroke, the announcement of the reserves release pushed crude beneath the lows it reached during its “flash crash” in May, and all the way back to where it stood soon after Libya revolted in February.

It wasn’t so much the trivial additional supply. The global release of reserves amounts to maybe 16 hours of planetary crude consumption, while the US half of the total represents about a day and a half of domestic demand.

More likely, oil fell as much as it did because the announcement carried a whiff of desperation, coming on the heels of lousy economic data, downgraded economic forecasts from the Federal Reserve, and budget-cutting talks likely to sap growth further.

The Obama administration insisted for months that no such release was needed because there was no shortage of supplies. Now, with Brent already $10 off its peak and growth cooling, the White House had suddenly reversed course and lurched into action.

Some analysts think the move might actually work as intended over the longer term. For example, the commodity research group at Goldman Sachs is preparing to lower its Brent crude forecast for next year, from $130 to about $124 a barrel.

Now, even Goldman’s liable to get it wrong from time to time. But here’s guessing that, even if that guess proves spot-on, they won’t be bumping fists at the White House.

Disclosure: None