Strategic Petroleum Reserve? Much Ado about Nothing
Just as the thought that Charlie Sheen can actually be rehabilitated, the idea that releasing barrels from the U.S. Strategic Petroleum Reserve (SPR) can alleviate the upsurge in oil prices is a nice thought, but it is a specious argument.
First and foremost, as Martin Sheen’s son, Charlie was born on third base, but for some unknown reason the guy thinks he hit a triple. There’s no basis for his line of thought.
Similarly, all the banter about releasing barrels from the SPR is not reflective of the reality of the facts. Why do we need to release barrels of "sweet" crude oil from the SPR when there is already a massive glut of the stuff sitting at the Nymex delivery hub in Cushing, Okla.?
After all, crude oil stocks in PADD II (Midwest) are at a record +103 MMbbls, of which, a record +40 MMbbls are stored at the Nymex hub in Cushing. Furthermore, oil stocks in the U.S. refinery epicenter in the Gulf Coast (PADD III) are in the third quartile, 172.4 MMbbls.
So what exactly would be the purpose of releasing barrels in PADD III (SPR) when stocks up the pipe at the Nymex hub in PADD II are already at (virtual) max capacity? Outside of trying to score a couple of political points on the rhetorical scorecard, there is not much to gain.
Let’s keep things in perspective, the SPR is already filled to max capacity, ?726.5 MMbbls. Of these barrels, ?40% or 293 MMbbls are ‘sweet’, which the government defines as oil containing a maximum of 0.5% total sulfur.
Now let’s consider that two weeks ago as of today, speculators on the Nymex (non-commercial traders) owned a net 275.6 MMbbls. According to the Nymex rule book, the maximum sulfur content of foreign crude oil deliverable against the WTI contract is <=0.46% sulfur.
In other words, net length held by speculators in the Nymex oil market could (theoretically) offset 94% (? 19 in 20 barrels) of the ‘sweet’ crude oil that Uncle Sam has on reserve (see Chart of the Day in today’s issue of The Schork Report ).
Therefore, just as we discussed in our March 14th report to clients… why tap into the SPR when we can first tap into Wall Street?
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Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.