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Schork Oil Outlook: The SPR is Now in Play

Wednesday, 28 Jul 2010 | 11:57 AM ET

Regardless of today’s DOE inventory report, crude oil supplies are more than sufficient, as we see in the Chart of the Day in today’s issue of The Schork Report. As of the end of 2009 total crude oil stocks in the U.S. (commercial + SPR) adjusted for population growth was 3.47 barrels. That was the highest ratio since 1993. If we extrapolate current inventories, then the ratio for 2010 rises to around 3.51.

What is also interesting from today’s chart was the decline in the ratio through the 1990s. Part of this decline was the result of an 11% increase in the U.S. population, from 254 million in 1991 to 282 million in 2000.

Another driver for this decline was the decision by oil majors to switch in the middle part of the decade to quasi just-in-time inventory management practices. For example, the ratio on commercial stocks alone dropped from 1.29 in 1993 to 0.92 by 2003. This ratio is now back up to approximately 1.17 today.

Lastly, the third driver for the decline through the 1990s was the apparent decision by the Clinton Administration to play politics with the Strategic Petroleum Reserve (SPR).

The SPR was created during the Ford Administration in response to the 1973-'74 Arab oil embargo. Barrels started moving into the reserve in 1977 during the Carter administration, to which a total of 108 million barrels moved in by the time Carter left office in 1981. Through the next eight years of Reagan’s two terms another 452 million barrels were added. Then through the first two years of GH Bush’s term, 26 million barrels went in which brought the SPR to 586 million barrels by 1990.

For the first time since inception, barrels moved out of the SPR in 1991 as we saw a net decline of 17.2 MMbbls in the wake of the first Gulf War. Barrels were then added in 1992 bringing the net build under GH Bush’s only term to 15.2 MMbbls.

Thus, three administrations (1 Democrat and 2 Republican) and three (bi-partisan) builds in the SPR.

As we move on the Clinton Administration added 17 MMbbls in the first two years, but then the games began. In 1995 we saw a slight decline (only the second since inception) of 30 thousand barrels. But in 1996 we saw a total of 25.8 MMbbls withdrawn from the reserve. Got that? Clinton took out 50% more oil from the SPR in the lead-up to the mid-term elections than Bush did while Saddam Hussein was torching Kuwaiti oilfields!

Over the next three years we saw a small net build of 1.4 million barrels, but once again, in 2000 the Administration withdrew 26.7 million barrels in a thinly veiled attempt, in our humble opinion, to help get Al Gore elected. Thus, the fact the Mr. Global Warming now rails against the evils of Big Oil is an absolute joke.

As covered in today’s issue o The Schork Report, all told, in Clinton’s eight years a net 34.1 million barrels of oil was drawn down from the SPR. The fact Nymex crude oil averaged $20.19 a barrel through his time in office (Feb-1993 to Jan-2001) is less like a joke and more like a crime.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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