A Release From The "Strategic" Petroleum Reserve

Not even W ever stooped this low. I believe we have just witnessed the first use of the Strategic Petroleum Reserve (SPR) as a way to stimulate the economy. The SPR exists for use in emergencies. The Wall Street Journal alerted me to the move yesterday afternoon

The International Energy Agency (IEA) said it will release 60 million barrels of oil from emergency stocks in the next 30 days to alleviate supply problems caused by the shutdown of Libyan crude exports due to the civil war.

The IEA, which represents major energy-consuming nations, said the tight supply situation was becoming a threat to a fragile global economic recovery.

"I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy," IEA chief Nobuo Tanaka said.

So which is it, Dr. Tanaka? Is the supply situation tight? Or is the market well-supplied? Clearly, this is a stimulus, not an emergency. The IEA will release 30 million barrels from OECD stocks, and the United States will release 30 million barrels from the SPR.

To understand this, you must understand the role of the IEA in the oil markets. Each month, they calculate the call on OPEC. This is how much oil OPEC is expected to produce to meet the IEA's estimate of global demand. (There is no slack in non-OPEC supply, what is called spare capacity.) Sometimes OPEC takes the call, and other times they tell the IEA to leave a message. Usually the latter.

OPEC does or does not respond based on its internal policies, self-interests (Saudi Arabia) and its own estimate of world demand. A short time ago, OPEC failed to raise production quotas when Algeria, Venezuela and Iran objected. However, production quotas are largely meaningless, which is evident in the often-low compliance rate. Member states routinely produce more (or less, usually more) than their quota according to their economic needs.

Saudi Arabia wanted OPEC to produce more oil at that meeting, but was thwarted by a minority of the members. It is reported that the Kingdom is raising production now, but not fast enough to suit the IEA.

Saudi Arabia has said it would boost production by 1 million barrels a day. The IEA has said its preliminary numbers show the kingdom has already increased output by about 500,000 barrels a day. Kuwait has also said it could hike its production by up to 200,000 barrels a day this summer.

On Thursday, IEA Executive Director Nobuo Tanaka said the emergency release was taken to make up for a delay before Saudi supplies hit the market.

This is complete nonsense. The stocks release is meant to target speculators and bring prices down, to achieve a "soft landing for the world economy." It was working yesterday.

Light, sweet crude for August delivery ended down 4.6% at $91.02 a barrel on the New York Mercantile Exchange [Nymex]. Prices fell as low as $89.69 a barrel earlier in the session, their lowest level since Feb. 22. August Brent crude oil futures settled down 6.1% at $107.26 a barrel on ICE Futures Europe.

Oil market observers John Kemp and Fadel Gheit believe the crackdown on speculators is obvious. Here's Gheit.

“This is the straw that breaks the camel’s back — this is the tipping point,” said Fadel Gheit, oil analyst for Oppenheimer, a leading investment bank. “The speculators will have to change their positions. Instead of betting on higher prices they have to bet on lower prices."

The Kemp article is worth reading, especially in regard to past objections (from the IEA itself and others) "to using the SPR to mitigate purely economic disruptions or manage price rises."

And what about the role of the United States? Here things get fuzzy, but I believe this amounts to a phony "We Care" signal from the White House. Or as Dan Gross calls it in the Daily Ticker video below, "propaganda by deed." I also believe the United States exerted pressure on the IEA to get the stocks release done, but obviously I can't prove that. This SPR release is just the kind of nonsense we get in the absence of an effective, long-term policy for dealing with America's oil dependency.

In short, there's no emergency, but this is exactly how we might expect morally bankrupt politicians to act in a failing economy—use our "strategic" oil reserves to give the desperate junkies their fix.

Here's the video.

 

Comments

[Brian M]

So, if I understand the plan... the IEA releases roughly 2mpd (probably at something like $80-90/barrel) for 30 days, which the Chinese, Asians, and growing non-OECD countries buy up either for their own SPRs or to fuel their growth (after all, the combination of growing economies and large sovereign wealth funds means they can still outbid the OECD). 30 days later, absent the Saudis actually adding 1-2mbd, we are back where we started. Basically, it's like a 30-day 10% off sale for the Asians.

Of course, the lower oil price would tend to build pressure in OPEC to cut production to restore the higher price point. What guarantee is there that the KSA is actually going to increase production with lower prices when they didn't do it with higher prices? None.

In one of the releases I read that part of this was to address a "temporary" shortage of light sweet crude. However, my understanding is that the majority of any marginal increase from the KSA is probably not light sweet. So, once the increased light sweet from the SPR is shut off, where is the replacement? Magically restored production in Libya? Seems unlikely on that time frame.

Moreover, how does this really stop the speculation? Doesn't it just push it out (sort of the opposite of the way the home buyers credit pulled forward demand)? They may have to temporarily reverse their positions in order to cover, but they would have to think this is temporary and that it would simply result in a bounce sometime after the increased supply is withdrawn. Absent evidence that KSA is actually making meaningful increases (and that the rest of OPEC is maintaining their essentially full production), wouldn't this just cause a minor re-shuffling of the portfolios? In fact, if they expect a bounce, might you not see them buy the dip and offset some of the expected price drop?

This seems like an almost complete public relations move, with the added consequence that people will probably get hit with a price increase in the fall.