SPR: Political expediency at the expense of long-term strategy
Spot Nymex crude oil for August delivery settled last night at 95.42, 1 penny above the settle for Wednesday, June 22nd, the day prior to the IEA’s thinly veiled attempt to control price. Brent oil futures closed last night at 112.48. That is still 1.73 or 1½% below the close for June 22nd, but it is 7.36 (!) or 7.0% (!) above last Friday’s settle.
Thus, six trading sessions since the IEA’s announcement and the market’s initial response seems to be… game on!
Analysts at The Schork Report recognize that this week’s bounce in oil might have been the residue from end-of-quarter machinations executed on behalf of “… oil companies and hedge fund managers and corporate jet owners…” and anyone else who Obama might have missed demagoguing the other day in his declaration of class war.
Bottom line, the move to release 1 of 12 barrels of the nation’s “strategic” supply of oil might be politically expedient, but it was an incredibly asinine maneuver.
When you try to control price you set two events into motion. First, as you distort the price mechanism you stimulate artificial demand as consumers no longer have to ration their resources; so they think, falsely, that they can have their iPhones and a full tank of petrol. Second, when price of supply is kept low by government intervention, you ultimately get less supply. This point is well-proven… just look at how Nixon’s price controls worked for motorists in the early 1970s.
To this effect, it is reported that Russia needs its benchmark Urals blend to average $115 this year to balance its budget. Through the first three weeks of June spot Urals averaged $113.31, but plunged to a $103.55 low after the IEA’s announcement. Does anyone really think Putin is going to abandon his own political goals to help out Obama?
To add insult to injury, even though spot WTI finished last night within a penny of the settle prior to the IEA’s announcement, the contango along the forward curve has blown out. The discount to the 3rd contract is up by 18%, to the 6th month it is up by 23% and to the 12th month (Aug ‘12) the discount jumped by 29%.
To this effect, given the better incentive to store barrels, there is a good chance we might not even see any SPR oil this summer.
As written in Monday’s issue of The Schork Report, the IEA’s decision is proof positive that the U.S. does not have a coherent long-term strategy to address it energy needs.
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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.