The Economissed: Thank God it’s Friday!

There is something strange afoot…..Strategic Reserves are exactly that – Reserves used in with some kind of Strategy – but where is the reasoning here for the release of oil yʼday? – According to Bloomberg:

“Releasing oil from the Strategic Petroleum Reserve makes sense in time of emergency, natural disaster or a major disruption in supplies. None of those events have occurred, which makes the decision yesterday by President Obama to tap the reserve puzzling….”

Obama, in concert with the International Energy Agency, plans to draw 2 million barrel a day during the next month from U.S. and international reserves. Oil prices plunged…

Perhaps that was the desired effect. The argument offered by Obama and IEA officials was that the released oil would offset the reduced supply of crude from Libya – estimated @ 132mln barrels). The release does coincide with the onset of the peak U.S. summer driving season according to the Department of Energy – more political than “Strategic” ?

But amid a run of gloomy economic news, itʼs hard not to imagine that other motives were at work. The FED on Wednesday lowered its growth f/cast for the year. Unemployment is heading in the wrong direction. The U.S. housing market still is in decline…etc…etc…

This is only the fourth time since the petroleum reserve was established after the mid-1970s oil crisis that a U.S. president has tapped it. The others were in 1991 during the first Gilf War; in 1996-97 to help reduce the federal deficit; and in 2005, after Katrina knocked out drilling rigs across the Gulf of Mexico.

Over the years Congress has adopted rules making it easier for the president to release oil at times of high prices. But with crude at about $95 a barrel before the announcement — well below the record of $147 in 2008 — that hardly seemed to be the case yesterday.

Whatʼs confusing about the reserve release is that it makes Obama look a little hypocritical – to say the least – of course actions speak louder than words when it comes to politics…..

We know what heʼs just done – but this is what he had previously said:

August 16, 2005:

I know that everybody’s getting killed by these higher gas prices, but we need to hold on to that reserve,” he said. “If the Saudi Arabian monarchy was overthrown and our imports were cut off, you’d be looking at $8- to $9-a-gallon gasoline.” (From an Aug. 17, 2005 article in the St. Louis Post-Dispatch)

August 31, 2005:

The reserve should only be used in the event of an emergency, and that we shouldn’t be tapping the reserve to provide a small, short-term decrease in gas prices.

July 7, 2008:

You have a situation let’s say where there was a major oil facility in Saudi Arabia that was destroyed as a consequence of terrorist acts and you suddenly had huge amounts of oil taken off…taken out of the world market. We wouldn’t just be seeing $4/gallon oil [sic], we could see a situation where entire sectors of country had no oil to function at all and that’s what the strategic oil reserve has to be for.

August 4, 2008:

We should sell 70 million barrels of oil from our Strategic Petroleum Reserve for less expensive crude, which in the past has lowered gas prices within two weeks.” Later in the day, on his campaign plane, on August 4, 2008: “I historically have been very hesitant about that but the idea of a swap actually I think has merit in terms of just short-term effect on prices. I offer no sort of suggestion that in any way that it’s going to make a long term impact on the fact that demand worldwide is going up and supply is flat lined at best. And we’re going to have to make some enormous adjustments, so the question is, if we’re replacing some light crude coming out with some heavier crude going in, is that going to have some effect on short-term supplies to provide people some relief? I think that that’s very different from saying we’re going to raid the highway trust fund and there’s no prospects of immediate relief and if there was then at most it’s 30 cents a day.

March 11, 2011:

So we’re going to try to do everything we can not only to stabilize the market, as I said, to the extent that we see any efforts to take advantage of these price spikes through price gouging, we’re going to go after that. If we see significant disruptions or, you know, shifts in the market that are — are so disconcerting to people that we think a Strategic Petroleum Reserve release might be appropriate, then we’ll take that step. And we’re going to monitor very closely.

German 10 year bunds – This looks the last chance saloon for Bund bears. It will be very hard to hang on to shorts if we see a qualified weekly close below 2.85%.

(click for sharper image)

(click for sharper image)

The Economissed is produced by Paul Wiggins head of Futures & Options at Market Securities in London.

Charts courtesy of Bloomberg

Related posts:

1. The Economissed: The good ship QEIII
2. The Economissed: Hawks Casting Shadows
3. The Economissed: Domino Theory
4. The Economissed: What next for Greece?
5. The Economissed: Sir King – the Sterling Crusades…

Link to this article: : http://www.goldmadesimplenews.com/markets/the-economissed-thank-god-its-friday-4371/

Posted by Paul Wiggins on Jun 24 2011. Filed under Analysis, Markets. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry