Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
S&P 500 Just 2% Below Record High, But There's More Stock Market Uncertainty - 19th Jul 18
Stock Market Technical Picture - 19th Jul 18
Gold Market Signal vs. Noise - 19th Jul 18
Don’t Get Too Bullish on Gold - 19th Jul 18
Bitcoin Price Rallies to Upper Channel – What Next? - 19th Jul 18
Trump Manchurian President Embarrasses Putin By Farcically Blowing his Russian Agent Cover - 19th Jul 18
The Fonzie–Ponzi Theory of Government Debt: An Update - 19th Jul 18
Will the Fed’s Interest Rate Tightening Trigger Another Financial Crisis? - 18th Jul 18
Stock Market Investor “Buy the Dip” Mentality is Still Strong, Which is Bullish for Stocks - 18th Jul 18
Stock Market Longer-Term Charts Show Incredible Potential - 18th Jul 18
A Better Yield Curve for Predicting the Stock Market is Bullish - 18th Jul 18
U.S. Stock Market Cycles Update - 18th Jul 18
Cayton Bay Hoseasons Caravan Park Holiday Summer 2018 Review - 18th Jul 18
What Did Crude Oil - Platinum Link Tell Us Last Week? - 17th Jul 18
Gold And The Elusive Chase For Profits - 17th Jul 18
Crude Oil May Not Find Support Above $60 This Time - 17th Jul 18
How Crazy It Is to Short Gold with RSI Close to 30 - 16th Jul 18
Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18
Stock Market Uptrend Continues, But... - 16th Jul 18
Emerging Markets Could Be Starting A Relief Rally - 16th Jul 18
(Only) a Near-term Stock Market Top? - 16th Jul 18
Trump Fee-Fi-Foe-Fum Declares European Union America's Enemy! - 16th Jul 18
US Stocks Set For Further Advances As Q2 Earnings Start - 15th Jul 18
Stock Market vs. Gold, Long-term Treasury Yields, 10yr-2yr Yield Curve 3 Amigo's Update - 15th Jul 18
China vs the US - The Road to War - 14th Jul 18
Uncle Sam’s Debt-Money System Is Immoral, Tantamount to Theft - 14th Jul 18
Staying in a Caravan - UK Summer Holidays 2018 - Cayton Bay Hoseasons Holiday Park - 14th Jul 18
Gold Stocks Summer Lows - 14th Jul 18
Trump US Trade War With China, Europe Consequences, Implications and Forecasts - 13th Jul 18
Gold Standard Requirements & Currency Crisis - 13th Jul 18
Focus on the Greenback, Will USD Fall Below Euro 1.6? - 13th Jul 18
Stock Market Outlook 2018 - Bullish or Bearish - 13th Jul 18
Rising Inflation is Not Bearish for Stocks - 13th Jul 18
Bitcoin Picture Less Than Pretty - 13th Jul 18
How International Observers Undervalue the Chinese Bond Market - 13th Jul 18
Stocks Trying to Break Higher Again, Will They? - 12th Jul 18
The Rise and Fall of Global Trade – Redux - 12th Jul 18
Corporate Earnings Q2 2018 Will Probably be Strong. What This Means for Stocks - 12th Jul 18
Is the Relative Strength in Gold Miners to Gold Price Significant? - 12th Jul 18
Live Cattle Commodity Trading Analysis - 12th Jul 18
Gold’s & Silver’s Reversals’ Reversal - 12th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Why a Strategic Petroleum Reserve Release Won't Help Crude Oil Prices or President Obama

Commodities / Crude Oil Aug 21, 2012 - 10:04 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleDr. Kent Moors writes: With oil prices showing no signs of retreat during the final months of the U.S. presidential campaign, beltway insiders are turning to one misguided solution to combat rising oil prices.

Releasing oil from the Strategic Petroleum Reserve (SPR).

Trial balloons floated all over Washington during the past few days. The only reason politicians didn't move on this sooner (say a few months ago) was the price level.


Until the last month or so, both oil and gasoline prices were heading in the other direction. Near-month futures contracts for West Texas Intermediate (WTI), the crude oil benchmark traded on the NYMEX, were below $78 a barrel in intraday trade toward the end of June, while the same futures for RBOB (the NYMEX traded gasoline contract) were at $2.55 a gallon.

At the time, all the sage pundits predicted that oil would fall below $60 a barrel; some even suggested that prices could approach $40. On the gasoline side, these same wise guys were proclaiming we may see prices at the pump breach $3.

Everything has changed quickly.

Yesterday morning the markets opened with WTI 23% higher than late June and RBOB up by more than 20%. Oil stands at more than $96 a barrel in New York, while Brent has exceeded $116 a barrel in London. And retail gas prices are once again approaching $4 a gallon.

Recently, I discussed why oil prices are moving up. But for some politicians, including the fellow running for reelection at 1600 Pennsylvania Avenue, those prices are becoming a job liability.

So it's back to hitting the SPR.

But there are four reasons why tapping the SPR won't make oil prices any cheaper in the end.

Maybe you should let your Congressman know about them...

Oil Prices: Untapping a Political Convenience
The reserve contains some 700 million barrels of oil. The initial rationale for the SPR was the Arab oil embargo of 1973-74, an attempt to prevent a recurrence of short-term price spikes over dependence on imported crude.

But the market has changed since then.

There will never again be an embargo of sales to the U.S. The SPR is now regarded as an offset to national disasters or other short-term national need. And it is also a protection against market imbalances. On 18 occasions since the creation of the SPR, oil has been drawn to offset shortfalls domestically, respond to a natural disasters (Hurricane Katrina), overcome international trade problems, or level off cross-border consignments.

And after each of these occurrences, the U.S. replenished the SPR.

In 2011 during the Arab Spring, however, 30 million barrels were drawn down to combat the loss of Libyan oil and a spike in global crude prices. Then, the 30 million was matched by a similar commitment from the International Energy Agency (IEA) - provided via member states.

As I wrote in OEI at the time, the attempt was destined to fail from the beginning. And it did. The experiment ended after one month. The entire six million barrels were not even used because there were insufficient buyers.

Tapping the SPR Won't Work
Washington is attempting to use the reserves for political purposes with hopes of artificially affecting crude prices.

But this won't work over the long run for four reasons:

•First, an SPR is not designed to work this way. Such draw downs will not have the intended effect because they are not in response to a genuine market lack of supply. The availability of excess oil, in itself, will not determine prices.

•Second, the amount necessary to affect prices over any extended time period is well beyond the ability of a political manipulation. Take last year's unsuccessful exercise, for example. The total amount of 60 million barrels was the commitment for an entire month. However, that translated into about 18 hours of global oil consumption.

•Third, the market compensates for the additional supply rather quickly. Unless policy makers are prepared to continue the draw downs, there is no effect. This is always the problem with policy moves that are not in response to genuine causes.
Finally, should the use of SPR barrels continue for any length of time, the reserves would need to be replaced. That requires purchases directly from oil companies. The market then draws its attention away from the draw downs and toward the buying of oil for replenishment as the base point for determining price. The attempt then would fail anyway and priced would move back up, based this time on what was actually paid for the oil moving back into the SPR - rendering the entire approach a grand waste of time.

All of this merely points toward a simple reality when it comes to oil prices. Presidents cannot influence them very much. It makes no difference what party the president represents or how much of a supporting majority that party provides on Capitol Hill.

There are no political solutions to higher oil prices.

What has been showing up in these trial balloons is a bit oil jawboning. Reminding the futures contract traders of a possible government fiat may subdue rises now and then. But draw downs from the SPR cannot restrain prices that are moving up because of market factors.

Whether or not there is an election looming.

Source :http://moneymorning.com/2012/08/21/why-a-strategic-petroleum-reserve-release-wont-help-oil-prices-or-president-obama/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 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

6 Critical Money Making Rules