IEA Release of Oil: A Whiff of Panic?

Includes: OIL, USO
by: Old Trader

The news that the IEA is releasing 60M barrels of oil from strategic reserves into the market came as a total shock to the market. Despite something of a rally in oil prices Wednesday, they're still well off of their recent highs.

So I had to ask myself, what could be the reasoning behind this surprise move? The answer that crossed my mind is disquieting, to say the least. There had been some folks suggesting that the U.S. release some oil from the SPR, in order to ease the pain at the pump, and to put some sorely needed cash into consumers' pockets in order to keep the economy moving forward, despite the fact that such a use was not behind the creation of the Strategic Petroleum Reserve.

But the IEA is comprised of 28 different countries, including the U.S., of course, so this carries much more weight, to my way of thinking, than a unilateral move by the U.S. would carry.

To briefly recap in broad strokes, to rescue the global economy, after the 2007/08 crisis, central banks the world over applied various packages of stimulus. This had the effect of saving the global economy from what may well have equaled, if not exceeded the Great Depression.

The day was saved, but growth was slow in coming, so additional stimulus was applied by many, if not most nations. Of course, it seems that there are always unintended consequences to contend with. In the case of the additional stimulus, one of the effects was a rapid rise in energy prices, as currencies competed in a race to the bottom.

The energy price spike bled over into food prices, where energy prices play a not inconsequential role. All of the economies that seemed to be turning the corner, albeit slowly, started to struggle against the headwinds of high commodity prices.

Now, the central bankers were caught between a rock and a hard place. Further easing would only aggravate the situation, but the pace of recovery was slowing notably. It should be noted that Thursday's unemployment numbers in the U.S. went the wrong way for the second week in a row, keeping the "magic" number of claims well above the 400K figure.

The conclusion that I can't help but come to is that world leaders are starting to get a bit (or perhaps, more than a bit), panicky at economic conditions. Ultimately, I believe their efforts will not be terribly helpful, and would use pullbacks in commodity prices to enter or add to positions.

Disclosure: I am long PVX, STO, GG, SVM.