Best of the Week
Most Popular
1.Gold Price Target of USD 2,300 - GoldCore
2.Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - Nadeem_Walayat
3.Why British Muslims Are Leaving Elysium Paradise for Syrian Hell - Nadeem_Walayat
4.Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - Nadeem_Walayat
5.Extreme Gold/Silver Shorting - Zeal_LLC
6.European Empire Strikes Back Against Greek Debt Fantasy, Counting Down to GREXIT - Nadeem_Walayat
7.Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - Michael_Noonan
8.Gold and Silver Price Headed for Breakdown - Jordan_Roy_Byrne
9.Greece Crisis OXI - Raul_I_Meijer
10.Flatline Investing and Dead End Debt Schemes - Doug_Wakefield
Last 5 days
The Most Pressing Reason Yet You Want to Avoid Investing in Retail Stocks - 4th July 15
Fed’s Full Normalization and the Stock Market - 3rd July 15
The U.S. Dollar's 2014-2015 Rally: Wave 3 in Action - 3rd July 15
Stock Market Where are we? And where are we Going? - 3rd July 15
Xi’s Anti-Corruption Campaign Is Key to China’s Prospects - 3rd July 15
How the New Iranian Nuclear Deal Will Impact Crude Oil - 3rd July 15
China's Stock Market Rollercoaster Ride Continues - 3rd July 15
Gold Stocks Cheap to Buy but Not for Long - 3rd July 15
Capital Controls and a Bank Holiday in Greece… Here’s How You Can Profit - 3rd July 15
Greece's Varoufakis: I will Resign if there's a 'Yes' Vote - 2nd July 15
The Student Loan Bubble: Gambling with America’s Future - 2nd July 15
Inflation Is Lurking, but This Asset Can Protect You - 2nd July 15
Three Total Wealth Stock Investor Tactics You’ll Need Because Greece Isn’t Over - 2nd July 15
Why This $5.6 Trillion Investor Profit Boom Is Set To Take Off - 2nd July 15
Greek Debt Crisis: "Too late to prepare now" - Video - 2nd July 15
Guaranteed US Dollar Death Dynamics - 2nd July 15
The Greek Stress Test & The Reality Of Incremental Changes - 2nd July 15
Forget Drachmas Greece Syriza Government Could Instruct Central Bank to Print Euros! - 2nd July 15
Greece Debt Crisis Trigger for Stock Market Crash or Bull Rally? Video - 1st July 15
Gold Stocks Break Below 2008 Low - 1st July 15
SPX Stock Market Retracement May be Over - 1st July 15
Silver Tunnel Vision 'Experts' - 1st July 15
Gold And Silver - Monthly, Quarterly Ending Analysis - 1st July 15
Europe’s Controlled Demolition - 1st July 15
The End of Dow 18,000; Bailouts No Longer Extended  - 1st July 15
Athens Mayor: Greek Government Should Resign - 1st July 15
China Stocks - This Is What a Bubble Looks Like - 30th June 15
Stocks Plunge on Greece Euro-Zone Financial Armageddon Blackmail - 30th June 15
Greece Crisis Shows Importance of Gold as Europeans Buy Coins and Bars - 30th June 15
Stock Investors Express Route to Profits in the Healthcare Sector - 30th June 15
Beyond the Greek Impasse - 30th June 15
Gold GDXJ : Impulse Move Pending - 30th June 15
Fed Interest Rate Increase Could Be Best Thing to Happen to Gold - 30th June 15
Marc Faber - Greece is Basically Bankrupt - 30th June 15
Greece - Shoot the Dog and Sell the Farm - 29th June 15
Grexit?, BIS Warning, Chinese Market Crash & Systemic Risk Shake the Global Economy - 29th June 15
The New "Sharing Economy" May Not Be the Profit Bonanza Everyone's Expecting - 29th June 15
Gold and Silver Greece and Short Positions - 29th June 15
Volatility and Sleep-Walking Markets - 29th June 15
Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - 29th June 15
Stock Market More Decline Ahead? - 29th June 15
China Stock Market Crackup - The Final Trap Looms... - 29th June 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

China Stocks - Where are they going?

U.S. Strategic Petroleum Reserve: What’s the Trigger for Release?

Commodities / Crude Oil Apr 11, 2011 - 10:07 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleIn early March, White House Chief of Staff Bill Daley told NBC that the Administration was considering releasing oil from the Strategic Petroleum Reserve (SPR) if it deems the high oil prices would threaten the U.S. economic recovery.

President Obama, in a press conference on March 11, also reiterated that a plan to tap the SPR was "teed up" and said he would move quickly should ‘conditions’ worsen. However, the President refused to say what price could trigger a release.


SPR - How Many Barrels & Where

Based on information from the Dept. of Energy (DOE) web site, the SPR, established after the 1973-74 oil embargo, is stored in salt caverns along the Texas and Louisiana coastline (see DOE map), and is the largest stockpile of government-owned emergency crude oil in the world.

The SPR completed its fill program on December 27, 2009. Today's inventory of 726.5 million barrels, with a 60/40 split between sour and sweet crude, is the highest ever held in the SPR (see chart).

Decision to Market in 13 Days


The current stockpiles could supply up to 75 days of net petroleum imports, based on EIA data of 9.70 million barrels per day for 2009. Average price paid for oil in the Reserve is $29.76 per barrel for a total cost of around $21.6 billion. The total value of the crude in the SPR is approximately $81.4 billion, using $112 per barrel as the market pricing point. The maximum drawdown capability is about 4.4 million barrels per day, and would take 13 days from Presidential decision to enter the U.S. market.

Two Major SPR Sales in U.S. History

However, major sales from the SPR have occurred only twice since the inception of SPR in 1975--post Hurricane Katrina under then-President George W. Bush, and former President George H. W. Bush sold it after Iraq's 1990 to 1991 invasion of Kuwait.

WTI at 30-month High, $4 Gas Imminent

WTI (West Texas Intermediate) oil was trading around just below $107 a barrel when President Obama had that press conference on March 11. But price has since spiked to $112.79, while Brent Crude broke above $125 settling at 126.65 per barrel on April 8, up 6.70% on the week. Meanwhile, DOE data showed the national average price of retail unleaded gasoline reached $3.684 per gallon on April 1, up 30% from a year ago (see DOE price map).



WTI, Brent or Gas?

So, here is an intriguing question --What is the price point that’s been “teed up” as indicated by President Obama? Since the discussion seemed to have been centered on oil prices, it is logical to think the trigger point should have an oil price reference, either WTI or Brent, among other considerations.

On the other hand, U.S. consumers (and voters) seem to have a price tolerance threshold of $4 a gallon at the pump, so perhaps the retail gasoline price would be that trigger point for an SPR release?

Is Speculation-Driven Price Spike An Emergency?

SPR is an emergency supply of crude oil intended to be the nation's first line of defense against an interruption in petroleum supplies. Nonetheless, the recent spikes of crude oil prices have very little to do with real physical supply shortages as the U.S. crude oil and petroleum products are well stocked (see DOE chart). Saudi Arabia also has pledged and pumped more oil, and created new light sweet blends to make up for Libya's lost barrels, but that has had little effect on oil prices.

Now, amid skyrocketing oil prices since the civil war erupted in Libya, and the gasoline prices moving closer to $4 a gallon at the pump, Democrats want President Obama to tap the SPR, but GOP leaders have so far rejected the proposal.

Although many have concluded that trading activities have very little effect on the prices of oil, this current crude market is a textbook case of excessive speculation overruns the supply demand fundamentals, where the conflict in MENA (Middle East and North Africa) has only added jet fuel to the speculation fire.

So that begs the another line of questions--Should the QE2-fueled speculation-driven price spikes in oil and gasoline be considered as a national energy emergency? Should the SPR be used to as a market price intervention tool?

Thin Line – Pricing in Risk & Speculation

Some have suggested that the high oil prices are just market pricing in risk premium of possible future supply disruption due to the political volatility in Libya, and MENA region. However, there’s a thin line between pricing in proper risk premium vs. pure speculation.

In the current crude market, massive speculation, juiced-up by the excess liquidity from Fed’s QE2, taking advantage of the oil geopolitics, is the prime suspect behind these irrational price levels, which are largely, if not entirely, detached from the physical and fundamental market.

Mere Intimation Will Do

From the current vantage point, it looks like the bull-charged oil market could ram through whatever price point the White House has in mind, and the possibility that the SPR could play a role as the market price moderator certainly adds an entirely different dimension to the crude oil prices.

Although it is still under debate whether the nation even needs to keep an SPR, one thing for sure is that oil would drop $5 in one day, and probably up to $20 in a month, with the mere intimation from the Administration that the SPR is scheduled to flood the market…without even an actual physical crude drawdown. 

Breaking The Trend Trading

This will most likely break the momentum of trend trading, reversing the funds flow, putting downward pressure on prices, thus recreating a two-sided market, instead of the current one-sided long.  Commodity markets tend to be more technically-driven than equities, and crude is deep in a bull trend trading mode.  Unless something happens, such as the government stepping in with an SPR release announcement, or peace on earth, for example, to crash the speculative upward momentum, very little would faze oil.

WTI Could Be Misleading 

Since we have not seen any Executive action with Brent breaking above $125, it seems to suggest President Obama is looking at WTI as the gauge for SPR release.  WTI has been trading at a discount to ICE Brent primarily due to the inventory glut at Cushing, Oklahoma, the delivery point of NYMEX, pressuring the WTI price, while U.S. gasoline RBOB futures are moving in tandem with Brent, far outpacing WTI.  So using WTI as a reference point for SPR related dedisions is a bit misleading and could result in a case of "too little too late" in regards to the runaway oil and gasoline prices.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at http://www.econmatters.com/.

© 2011 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History