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
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20
Global "Debt Mountain": Beware of This "New Peak" - 13th Nov 20
Overclocking Zen 3 Ryzen 5600x, 5800x, 5900x and 5950x to 4.7ghz All Cores Cinebench R20 Scores - 13th Nov 20
Is Silver Leading Bitcoin or is Bitcoin Leading Silver? - 13th Nov 20
How Elliott Waves Simplify Your Technical Analysis - 13th Nov 20
How to buy Bitcoins using debit/credit card? - 13th Nov 20
Will COVID Vaccine Kill Gold and Silver? - 12th Nov 20
Access to Critical Market Reports - 12th Nov 20
Stock Market Dow Futures Reach 30,000 on News of COVID-19 Vaccine Trials Success - 12th Nov 20
8 Terms & Conditions You Must Know Before Asking For Life Insurance Policy Quotes - 12th Nov 20
Gold Stocks Post 2020 US Election Outlook - 11th Nov 20
Champions’ League Group Stage Draw: All You Need To Know - 11th Nov 20
Stock Market Secular Trend - 11th Nov 20
Stock Market Correction Curtailed by US Election - 11th Nov 20
What Causes a Financial Bubble? - 11th Nov 20
Ryzen 9 5900X RTX 3080 - Scan.co.uk vs Overclockers.co.uk UK Custom PC System Builder Review - 10th Nov 20
Killing Driveway Weeds FAST with a Pressure Washer - Saving Block Paving from LOTS of WEEDs - 10th Nov 20
Trump Fired, Biden Hired, What Next?  - 10th Nov 20
Looking for a Personal Loan? Here Is What You Have To Know  - 10th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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

6 Critical Money Making Rules