Morning Petrospective – June 27, 2011

il prices were down $2.24 a barrel last week and heating oil prices were down more than 23 cents a gallon, while gasoline lost 18.20 cents a gallon. The big losses came 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. We noted at the time that it was not the amount of oil. It was not the timing. It was the simple fact that it could be done as a sudden, unexpected and coordinated source of oil supply.

The powers that be were out of bullets. We agree. The Fed could well have called the White House and told the president frankly that the central bank had tried everything it knew. Interest rates have been as low as they can go for a long time … and will remain low for “an extended period.” Inflationary pressures and the negative effects of the earthquake, tsunami, floods and tornadoes are probably “temporary” but there is nothing imminent to counteract them. Quantitative easing helped equities markets … but it pushed gasoline over $4.00 a gallon and another round could make inflationary pressure a permanent and rooted feature of the economy, rather than the temporary scourge it is now. Ben Bernanke almost certainly said there was nothing new he could do.

The president could have called the Saudis to see how much more they could produce. We do not know what they told him, but there is a balance between producing more and maintaining that spare capacity for a really rainy day. At the end of the conversation, he probably realized that the SPR was the only arrow left in the quiver.

In releasing the oil, we run the risk of there being a genuine supply disruption that siphons off all 700 million barrels in the SPR. Halfway before we get there, though, we would have bigger problems. We may end up paying more for the oil we buy back to replace it, but we may end up buying back cheaper. There are risks, but all things considered, this might end up working. Of course, higher margin requirements might have accomplished the same objectives at less cost, but that might have brought other problems. This could work.

It has had the desired effect on oil prices, which especially helps the US and Japan. It has not helped relations between Opec and the OECD. Of course, the Saudis and its allies were angered by the inaction of the other Opec members at the last meeting. But, Saudi Arabia agreed to make up any shortfall. The IEA was especially angry at Opec, as a cartel, and was eager for this release. But, it now puts the Saudis in an awkward position. If it continues to increase output, prices might drop much more. That makes one wonder just how angry the Saudis are at Iran and Venezuela. If the Saudis do produce a good deal more, then we will have proof positive that they were really ticked off at Vienna.

Observers are divided on this. Some have said that the Saudis knew and approved of the move. Others suggest that they were caught off-guard by the move. The IEA said the move was coordinated with oil producers, presumably Saudi Arabia, Kuwait and the UAE. We cannot imagine that Hugo Chavez or Mahmoud Ahmadinejad was given a call. The Saudis have not yet made any comment officially on the release, Dow Jones noted on Friday.

If Opec wants the price to remain high, it could cut output in response. We do not think that the Saudis would allow this, though, and the other members of the cartel are rarely sincere about cutting their own output. It is something to watch for in the days ahead.

FMX Newswire

FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Bentek Energy

• Supply/Demand Balance Analytic Report – Bentek expects EIA-914 Will show 0.6 Bcf/d Growth March to April.
• Industrial End Users Analytic Report – Industrial Demand Stays Strong Over the Weekend.
• Canadian Observer – Storage Injections Likely to Rise As Demand and Exports Fall.
• Midcon Observer – Demand Dips Lower Over Weekend, Allowing Daily Injections to Increase.

Platts

• Cash Brent / Dubai spread at 6-month low & Dubai contango widens, following IEA and oil stocks decision..
• South Korea and Shanghai bunker operations resume as Typhoon Meari passes.
• Anadarko-led joint venture eyes Mozambique LNG project decision in 2013, says Cove.
• UK's Rockhopper tests landmark oil discovery offshore Falkland Islands at what it calls 'commercial rates'.  

Bloomberg

• Oil Falls on Outlook for Slowing Demand; IEA May Release More Stockpiles.
• Poland Said to Price JSW’s $2.1 Billion IPO Above Mid Point of Range.
• Fukushima Retiree Leads Anti-Nuclear Shareholders at Tepco Annual Meeting.
• Tripoli Running Out of Gas Amid Sanctions.

Technical Recap

Crude Options Report / Straddle Runs

NG Options Report

Market Prices

Premium Subscriber (click here to register):

Volumes & Open Interest

End Of Day Straddles

Settlements

To view our energy news and articles on your PDA or mobile device, click here.