They’ll spend the next month pumping 30 million barrels of crude from the Strategic Petroleum Reserve into the tankers leased by oil refiners and oil traders. But to the market that this display was meant to cow, the operation already looks like a spent force.
Now that crude futures have reclaimed the levels held when the intervention was announced, we have to wonder if they will rise to the highs that prevailed when the plan was hatched -- and how quickly motorists might lose the modest discount they’ve been enjoying at the pumps.
The prevailing wisdom is that the mostly symbolic transfer of publicly stored reserves into private storage has already failed. This is based on the fact that some grades of crude oil are higher now than two weeks ago, when the release from the SPR was announced. Even back then, with Nymex futures down below $90 a barrel, it was obvious to many that the discount wouldn’t last.
What was not so obvious on the day of the release — but became apparent within 24 hours — is that President Obama made the decision to release reserves back in early May, and almost immediately began consultations with friendly Middle East oil exporters as well as oil-importing allies.
As it happens, early May was also when oil experienced its “flash crash,” in which the price reversed abruptly and viciously to the downside.
So now newsletter author Dennis Gartman is shocked, simply shocked, to discover that talks about releasing the reserve might have leaked into the market as soon as they started. He wants an investigation.
The Commodities Futures Trading Commission is already probing whether someone traded on the impending announcement of the SPR release hours before it was made. And just as soon as it gets to the bottom of that question, at five of never, it can ponder whether the information was already in the market for more than six weeks.
I mean, what are the odds that rapacious Middle Eastern royalty and international bureaucrats, armed with an immensely valuable, market-shaking inside scoop, might wish to consult with their neighborhood futures broker? As we know from the rash of domestic insider cases, the temptation to use every advantage, including privileged information, is all but irresistible to many who should know better.
So it’s probably pointless to gauge the effect of the SPR release by tracking crude prices over the last two weeks. Going back to the oil peak (and likely news leak) at the start of May, Nymex futures are still down $16 a barrel, while retail gasoline is cheaper by nearly 40 cents a gallon.
A lot of this is obviously the result of a clear and wide-ranging spring economic slowdown, rather than insider trading. But the fact that national governments were conspiring against oil-storing speculators undoubtedly played into the price declines.
So now we’re left to understand why prices are rising again just as the reserves are being released. One explanation is that all that’s happening is that government-owned reserves have been temporarily transferred into private hands, to no discernable effect on the longer-term supply/demand dynamics.
The availability of easily and profitably refined sweet crude near US shores has temporarily improved, driving down the price relative to Europe’s Brent benchmark and capping gasoline prices.
But there was never a physical shortage of crude — not with inventories near historic highs. The reason they’re high, though, is that the growth in supply is not likely to keep up with growth in demand over the next year and beyond. Emerging markets are continuing to develop their thirsts, while mature fields in Russia, the North Sea, and Mexico start to wind down.
Meanwhile, Saudi Arabia is using more and more of its crude to supply energy to its own citizens, who are not in a mood to conserve after pocketing the monarchy’s generous recent handouts. The cheaper gasoline delivered by the SPR release has likewise propped up US demand.
Trouble on a Transocean (NYSE:RIG) drilling platform off the coast of Ghana only serves to remind everyone, along the lines of the ill-fated Deepwater Horizon, that the replacement reserves for those currently being depleted will not come nearly as cheap.
On top of that, throw in the Arab Spring of popular protests demanding democracy, and the implacable hostility between Iran on the one hand and Saudi Arabia and Israel on the other, in separate grudge matches that could send prices through the roof at a moment’s notice.
It all makes me want to fill up my car and just drive somewhere, while I can. Others see the same thing and lease another oil tanker for storage.