Morning Petrospective – June 24, 2011
il prices were hammered on Thursday as the US Strategic Petroleum Reserve (SPR) and the International Energy Agency (IEA, representing Europe or all OECD) announced a coordinated sale of 60 million barrels from strategic reserves. It was not the amount of oil that was significant, it was the willingness of the US and EU to work together to bring pressure to bear on oil prices. The coordination was an eye-opener, and it was a welcome clarification of the Obama Administration’s stance on the use of strategic reserves, which had not been clear until Thursday.
The Clinton Administration had no problem using strategic reserves to soften oil prices for political or economic reasons. Regardless of the motivation, the impact was felt in both spheres. That, now, appears to be the position of the Obama Administration, which had not made its position clear until now. The Bush Administration had refrained from using strategic reserves unless there had been a physical disruption of some sort, like Hurricane Katrina most notably.
We are not going to pass judgment on the comparative merits of the contrasting approaches. We actually see the reasons for both. But, in this case, the Fed was out of ammunition, the federal government was long ago out of bullets and both were using machine guns as clubs at this point. Releasing oil may turn out to be the event that performed CPR on an economy that was wounded.
Again, it was not the oil itself. Sixty million barrels is roughly what we are losing from Libya every 45 or 60 days, depending upon how much one believes the rebels are actually producing. Libyan oil is still better than the oil released from the reserves, though. The reserves put traders on notice that they are willing to release oil and can alter the supply dynamics. Opec is not the only source of additional barrels of oil. That is the message the market heard on Thursday.
Bulls countered that the Saudis must really be much closer to exhausting their spare capacity than is commonly believed for them to approve of this move. They say we are squandering our vital reserve. That is one way of looking at it. We tend to see Saudi approval of this as payback for the conduct of the last Opec meeting. It hurts Iran. And it especially helps the US and Japan.
Dire bears said that the economy must be in much worse condition than anyone knows for the government to turn to the IEA and SPR to agree to release oil together. 8 million barrels of gasoline unaccounted for, if one takes the DOE figures at face value, which apparently is not the way to go.
Oil prices were down dramatically. Gasoline prices were down 10 cents, which returns $40 million a day to consumers. It is the equivalent of a $15 billion one-day tax rebate. Added into the other 50 cents we have seen gasoline prices drop since the end of April, this should become part of a larger tax rebate equivalent approaching $90 billion annualized. Of course, that needs to be tempered by the fact that there had been a tax increase of $233 billion from September 1st to May 1st as investors reacted to QE2, a weak dollar and the Arab Spring.
The DJIA was down 59.67 to 12,050.00, and the euro was down .73 cents after having been down substantially more in earlier trading. A late story broken by Reuters revealed that Greece had accepted an austerity budget that had triggered approval of a three-month emergency loan, and equities and the euro rallied dramatically in the wake of that story.
Lower oil prices should be bullish for the economy … but we need time for the price cuts to make it to the pump to give the equivalent of a tax rebate to consumers.
FMX Newswire
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Bentek Energy
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Platts
- Iraq's largest refinery Baiji has been closed after a "huge" attack. The 310,000 b/d refinery was offline 1 week in Feb after another attack.
- Black & Veatch, Chemtex to build two new LNG facilities in China.
- Pakistan oil, gas drilling falls short of target in fiscal 2010-11.
- Aug ICE Brent went into a $0.07/b discount to Sep at 0930 GMT, the 1st contango since Mar after IEA plan to release 2 mil b/d oil in 30 days.
Bloomberg
- Crude Oil Futures Decline on Slowing U.S. Consumption, IEA Reserve Release.
- IAEA to End Fukushima Meeting Without Agreeing on New Nuclear Safety Rules.
- Gillard Stares Down ‘Electoral Annihilation’ With Carbon Tax.
- Tax Break for Mortgage Debt Is Ready for the Wrecking Ball: View.
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