Crude Oil Manipulation Makes Case for U.S. Oil ETF and Exxon Play

Includes: USO, XOM
by: John Dalt

Last Thursday morning, before the market opened, the International Energy Agency (IEA) announced the coordinated release of 60 million barrels from strategic petroleum reserves held by oil consuming countries. The U.S. contributed 30 million barrels of this additional supply. The release was to take 30 days.

This was to be the third time crude oil had been released from the U.S. SPR, and the largest. The SPR was tapped previously during the first Gulf War to remove Iraq from Kuwait and again after Hurricane Katrina when super-tanker off load facilities were damaged.

West Texas Intermediate (WTI) Crude oil closed at $95.41 on the day before the announcement. On 6/29 WTI traded back to $95.02 The USO (Oil etf) closed at $37.08 on 6/22 and traded as high as $37.60 on 6/29. The president and other " market manipulators" bought four market days of "cheap oil."

The real stupidity of the move was that crude oil had been going down in price since the beginning of May. The only real rally we have seen since April is since the geniuses at the IEA and White House tried to intervene in the free market.

According to Forbes, 60 million barrels represents about 16 hours of global crude oil use. Their article argues the SPR should be liquidated and abandoned. Theirs is a free market argument; that even in times of war or supply disruptions, oil is always available at the "market price."

We are sympathetic to the free market argument, but prefer to have extra canned food in the basement in case a storm or natural disaster causes the market price of food to spike in price. The shortage and ensuing price spike may only be temporary, until transportation can be restored. But, why not be a good Boy Scout?

Our point today is the futility of the IEA and Obama' s attempt to manipulate the crude oil market with the blunt force of 60 million barrels. Why did they do it? The stated reason was to replace the 1.6 million barrels of "sweet" crude that was off the market from Libya. Exports from that country had dwindled because of the clash between rebels and Qaddafi's government forces. Libya's crude oil went to Italy's refineries to supply Europe. Italy's refineries were not able to refine heavier crude oil, like Saudi Arabia’s. Replacing Libya's sweet crude with SPR crude (heavier and sour) did not make much sense.

Some speculated that the action was taken to punish commodity speculators. That doesn't make sense as many had left the trade, or were short crude oil as the trend was down for the last 45 days. If anything, short speculators made a killing on the fall in price.

Maybe the administration wanted to send a message of displeasure to OPEC, since they didn’t increase production at their last meeting. That meeting had broken up acrimoniously, with Saudi Arabia vowing to increase production regardless of inaction by the cartel.

The end result, the world's Strategic Petroleum Reserves will be 60 million less than they were. Crude oil prices are as high as they were a week ago. If we want to replace the crude oil taken out of the SPR, our government will have to compete with refineries and other users for tighter supplies in the future. Obama releasing crude oil out of the SPR may be one of the most bullish signals the oil market could ask for!

It may be time to get long the U.S. Oil ETF (USO), and our favorite integrated oil company Exxon Mobil (NYSE:XOM).

Disclosure: I am long XOM.