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If Obama Taps Oil Reserve, It Could Send Wrong Signal

Thursday, 9 Jun 2011 | 4:41 PM ET

President Obama’s recent hints at tapping the Strategic Petroleum Reserve would be just the third major sale since the creation of the emergency oil reserve and the only time a drawdown didn’t involve a major domestic production disruption or a war.

Oil Barrels
Oil Barrels

“The Obama Administration is once again hinting that it may be willing to use the Strategic Petroleum Reserve to respond to persistently high oil prices following several months of Mideast unrest,” said FBR Capital’s Benjamin Salisbury, in a research note. “Although gasoline prices are a serious political challenge for the Administration, we note that the SPR is designed for responding to a ‘severe energy supply interruption,’”

White House spokesman Jay Carney said yesterday that the President is keeping open the option of tapping the SPR if necessary, something that Obama first alluded to back in March in the context of Libya turmoil. But a disruption to Libya's supply would be relatively small, considering the reserve has only been tapped after the refinery damage from Hurricane Katrina and the panic following Iraq’s invasion of Kuwait.

Oil prices have rebounded recently, topping $102 a barrel on Thursday as OPEC failed to come to a consensus on production quotas. Even worse for an administration seeing the economic recovery slipping away, is the fact that gasoline price futures for July have remained stubbornly above $3.

“His legacy is at stake,” said Joe Terranova, chief market strategist for Virtus Investment Partners. The former oil trader said the President may use other tools as well, such as loosening Gulf of Mexico drilling regulations and ensuring that the Dodd-Frank bill for financial institutions being implemented takes a hard stance against speculation.

A CNN/Opinion Research polljust released showed that 48 percent of Americans fear there may be a Great Depression in the next 12 months.

Still many traders have their doubts President Obama would want to set this new precedent. The Strategic Petroleum Reserve, created in 1975, holds almost 727 million barrels of crude and any drawdown would take 13 days to bring to market, according to FBR.

“Releasing oil from the SPR when there is not a disruption in supply would be nothing short of catastrophic,” said Brian Kelly of Brian Kelly Capital. “It would indicate panic within the administration over the state of the economy, but more importantly it would take the markets less than a second to realize the US will need to fill up the tanks again.”

“Oil would soar,” added Kelly.

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