Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold: Lose a Battle to Win the War - 14th May 21
Are You Invested in America’s “Two-Hour Boom” Fast Shipping Stocks? - 14th May 21
Gold to Benefit from Mounting US Debt Pile - 14th May 21
6 Solid Signs You Should Have Your Smart Device Repaired Right Away - 14th May 21
Ways to Finance Your Business Growth - 14th May 21
Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
How Much CHIA Coins Profit from 100 Plot 10tb Farm? Hard Drive Space Mining - 13th May 21
Stock Market Bulls Getting Caught in the Whirlwind - 13th May 21
Legoland Windsor Mini land and Sky Train Virtual Tour in VR 360 - UK London Holidays 2021 - 13th May 21
Peak Growth and Inflation - 13th May 21
Where’s The Fed? Watch Precious Metals For Signs Of Inflation Panic - 13th May 21
Coronavius Covid-19 in Italy in August 2019! - 13th May 21
India Covid Apocalypse Heralds Catastrophe for Pakistan and Bangladesh - 13th May 21
TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
Gold Price During Hyperinflation - 12th May 21
Stock Market Extending Phase Two? - 12th May 21
Crypto 101 for new traders – ETH or BTC? - 12th May 21
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Poorly-Timed SPR Oil Release Could Cost U.S. Taxpayers $1.5 Billion

Commodities / Gold and Silver 2011 Jun 27, 2011 - 03:46 AM GMT

By: EconMatters

Commodities

Best Financial Markets Analysis ArticleWorld crude oil market has been rocked by the surprise announcement of the International Energy Agency (IEA) to release 60 million barrels of oil from member countries’ strategic petroleum reserves (SPR). The US led the effort by chipping in 50% of the planned release, while Japan, Germany, France, Spain and Italy are providing most of the rest.


Questionable Timing

This kind of coordinated sale from the IEA has only occurred twice before on a supply emergency basis – 1991 Persian Gulf War, and Hurricane Katrina in 2005. This time around, the “supply emergency” cited was the disruption stemming from the conflict in Libya, which started about four months ago.

So just based on face value, the timing seems questionable, and we have not even got into the philosophical debate as to whether SPR should be used as a market price equilibrium tool, which was briefly discussed in my previous article, but will not be the focus of this discussion.  

What Supply Emergency?

Unlike the two previous releases by the IEA, currently there’s no similar crude supply shortage situation. Libya and Yemen are the two biggest concerns that the unrest could destabilize larger oil-producing countries in the region. However, these two nations produce less than 4% of the world's oil needs, and Saudi Arabia and others have boosted output to make up for much of the shortfall.

In the U.S., crude inventory remains high at 363.8 million barrels as of June 17, above the average range, and there’s no dire shortage in products either (See Chart Below).


Outside of the U.S., stocks are building as well. From Oil Daily dated June 21:
“OECD commercial inventories for crude and products rose again in May, which came on the heels of an almost 1 million b/d jump in April….At 2.656 billion barrels, OECD inventories provide a solid cushion…”
If there such a “tight” European crude market caused by Libyan disruption as many, including the IEA, cited, then there should not be such a build in inventories in OECD.

Other Possible Incentives

Others believe the move by the IEA and the U.S. is to
  • Curb high consumer gasoline prices
  • Send a message to market speculators
  • Counter the failed production increase at OPEC meeting in Vienna on June 8
  • Act as stimulus amid faltering global economy by lowering the commodity prices
Already In Progress - Curing High Prices

Regarding the high gasoline and oil prices, the market is already in the process of taking care of that.

Crude oil was already collapsing to around $92 for WTI and roughly $112 for Brent, during the past week or so, mostly related to the deepening debt crisis in Greece, Europe, and a stalled U.S. economy with poor employment, housing reports, and a dried-up QE2.

Meanwhile, the robust China energy demand as touted by many Wall Street Banks is fading fast as China is still battling inflation, suggesting more monetary tightening which could ultimately slow down demand for oil.

Moreover, if the intention is to bust the uptrend of oil price, and since Brent is currently regarded as more of the global benchmark than WTI, there are several technical entry points where the government could have done the SPR release to bust traders' momentum--for example, when Brent was at $100 to $115 levels in Jan/Feb, or around April when it hit $127 (See Chart Below)--all are more sensible than the current entry point. 


Gas Price Intervention - Six Months Too Late

According to AAA, as of Sunday, June 26, the national average regular unleaded gas has dropped to $3.575 a gallon, or 10%, from almost $4 a gallon on May 6. Gasoline price is still up about 30% year-over-year. So if it is really about giving consumers a break at the pump, intervention should have been implemented at least six months ago to nip it at the start of the run-up (See Chart Below).

SPR Sale Actually Benefitting Speculators

Based on supply and demand analysis, I have long contended that speculation is one significant factor in the recent surge of oil prices, particularly with Brent, since ICE exchange is essentially unregulated.

However, if you want to tap the SPR to quell the speculative enthusiasm, then the most effective timing of an SPR sale would be when players are predominantly long on oil.  In an April 2011 article, I questioned the SPR trigger release of the Obama Administration as despite much rhetoric, there was no action when Brent was reaching up to a record of $127, and gasoline in the U.S. was closing in on $4 a gallon.

Now that the markets are going through a correcting cycle and more speculators are taking the short position, the SPR release, instead of sending a warning message, most likely benefitted a lot of the speculators.

$800 Million Lost Revenue

Even if we put aside the supply, price and economic concerns discussed so far, from a pure financial management standpoint, the U.S. government also failed miserably as you should sell close to the top, instead of at a near bottom.

Reuters reported that the U.S. will offer all 30 million barrels in one bid sale with a base price of $112.78 a barrel, which is based on the price of the Louisiana Light Sweet crude (LLS) in the five days prior to Thursday, June 23. Companies must submit their bids by June 29, and may bid above or below the base price. The payment and delivery are to take place in August.

From this SPR sale time table, the final sale price of the 30 million barrels most likely will be far less than the $112.78 base, and could even be closer to $95, as August is almost the end of the summer driving season, and more market weakness will start manifesting two months into the end of QE2.

Brent is already at around $105, and by my projection, WTI would be at $80 levels by September even without this SPR intervention when markets and Ibnaks can no longer ignore the fundamentals. So using the spread between the high of Brent at $127, which is the ideal time to sell SPR, a conservative estimate of the final sale price of $100 a barrel, and at 30 million barrels, it would suggest about more than $800 million of lost gross revenues.

A Synchronized Global SPR Buying?

More importantly, although oil prices have come down in response to the sudden additional SPR barrels, the effect will be temporary as it not only does not change the market supply and demand fundamentals, and also has interfered with the progression of a market equilibrium that’s already taking place.

Eventually, all the IEA members will need to replenish their SPR reserves, not to mention China has been busy building its strategic petroleum reserve and storage facilities since 2005, and will definitely take advantage of the newly cheaper crude prices, all thanks to the United States and the IEA.

Can you imagine what a global synchronized government crude buying program would do to prices? 

Sell You Lose, Buy You Lose 

Since the SPR is sold essentially at the bottom of the market, it mostly likely will cost a lot more to replenish, based on current economic projection.  The most ironic thing is that while trying to intervene the oil market, the U.S. government could end up driving prices further up than it would have been, and lose money both ways--on the sale and on the buy-back. 

The entire sell-then-buy-back process could very easily cost American taxpayers $1.5 billion, doubling the $800 million rough calculation I just did.

Geopolitically Speaking

OPEC is now ever divided than before as evidenced by the failed production increase accord in Vienna. In one camp are Saudi Arabia and its Gulf State allies with a long view in favor of keeping a reasonable world oil price. At the other side are Iran, Iraq, Venezuela and Ecuador favoring a high oil price and oppose a production increase.

Nevertheless, after the failed meeting, Saudi has pledged to unilaterally pump more oil to keep the world oil price in check. Riyadh is the one with the significant enough capacity to influence the oil supply, whereas the Iran, Iraq etc. most likely cannot afford to reduce oil output thus sacrificing the much needed revenue to counter Saudi’s increase.

This coordinated IEA effort is supposed to go along side with Saudi's planed increase and tide the market over till Saudi's ramped-up production hits the market.  But on the other hand, this IEA action could tip the balance at OPEC as Saudi may see it is no longer necessary to go against other OPEC members on production issue, and OPEC would be one big happy cartel again.    .

Too Little, Too Late & Too Desperate

All in all, this oil intervention of the Obama Administration came too little, too late. To put it in perspective, the IEA estimate global oil demand for 2011 is 89.3 million b/d, so the 60 million is not significant enough to sway the oil market supply and demand equation.

Furthermore, due to the poor timing, the damage to the global economy has already done impacting consumer and corporation spending pattern, whereas the cost inflation has already built into the goods and services supply chain, and manifesting in the latest U.S. consumer inflation numbers.   

And frankly, if the U.S. and other IEA member countries have to resort to SPR as an economic stimulus, it is just a testament to the colossal failure of (1) global monetary and fiscal policies, (2) the global synchronized quantitative easing, and the dire desperation of politicians for re-election.

U.S. Fed Chairman Ben Bernanke has basically admitted the failure of QE2 to revive the economy.  This SPR release acting as QE 2.5 is another waste of resource adding to the unmitigated disaster of the U.S. quantitative easing programs.   

Disclosure - No Positions

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - 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.


© 2005-2019 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