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Schork Oil Outlook: Switching to Bullish Bias

Did the IEA tip its hand?

In managing the Strategic Petroleum Reserve Program, the Office of Fossil Energy's overriding objective is to maintain the readiness of the oil stockpile for emergency use at the President's direction.
- Strategic Petroleum Reserve – Profile
DOE website

As part of this effort, the U.S. will release 30 million barrels of oil from the Strategic Petroleum Reserve (SPR)… As the United States enters the months of July and August, when demand is typically highest, prices remain significantly higher [emphasis ours] than they were prior to the start of the unrest in Libya.
- DOE Press Release
June 23, 2011

In our book, Saddam’s annexation of Kuwait and devastation to the U.S. refinery epicenter are emergencies.

In this vein, the onset of summer and stubbornly high prices do not constitute an emergency. Rather, yesterday's maneuver reeks of what we saw prior to the 2000 presidential election. Per the DOE’s website:

Even with the establishment of the Northeast Home Heating Oil Reserve, low distillate inventories in the Northeast continued to alarm the Administration in the fall of 2000. On September 22, 2000, President Clinton directed the Secretary of Energy to enter into time exchange agreements with oil companies for up to 30 million barrels of crude oil.

Under the exchange agreements, that oil (plus a vig) did not have to be returned until the fall of 2001, i.e., one year (hopefully) into Al Gore’s (Mr. Global Warming himself) first term.

Politics aside, yesterday's move by the IEA/DOE smacks of desperation. By signing off on the release, the Saudis have confirmed to the market that they cannot supply the light-sweet oil required for the driving season.

That is a potential problem. The Schork Report has been writing since March that we expected the gap in Nymex crude oil at 87.88 would be closed at some point this year. With the euro/dollar cross now threatening support at 1.400 along with the IEA/DOE’s announcement, now is the time to close that gap.

Failure to do so or success in closing the gap, but failure to establish momentum below there, creates a template for a whipsaw to yesterday's weakness.

Bottom line, releasing barrels is the only card the IEA/DOE had to play… and they just played it… and that is why analysts at The Schork Report are advising clients that we have switched our bias in the liquids to bullish.

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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.