Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Gold Price and U.S. Dollar’s July Rally - 28th July 14
Second Quarter Corporate Earnings: Marching Toward a Strong Economic Recovery - 28th July 14
Time to Put a New Economic Tool in the Box - 28th July 14
Mossad in Gaza, Ukraine and the Cult Of The All-Powerful Elite - 28th July 14
Elliott Wave Gold Price Projection Since 1970 - 28th July 14
Investors Remain Uncertain As Stock Fluctuate Near Long-Term Highs - Will The Uptrend Extend? - 28th July 14
The Mass Psychology Of Decline - 28th July 14
Will the US Destroy the World? - Don’t Expect to Live Much Longer - 28th July 14
GDM and GDXJ Gold Stocks In-depth Look - 28th July 14
Stock Market One FINAL High? - 28th July 14
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

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.


© 2005-2014 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

Free Report - Financial Markets 2014