While bulls were looking forward to a dovish Fed statement, they seem to forget that it is based on ...
Oil Sale Smells of Panic
06/24/2011 9:19 am EST
Tapping the Strategic Petroleum Reserve won’t have a lasting effect on gas prices, writes Moneyshow.com senior editor Igor Greenwald.
Thank the Almighty for the Strategic Petroleum Reserve. Up to 30 million barrels of the crude salted away in the salt caverns beneath Louisiana and Texas will get pumped out this summer, adding to plentiful stockpiles of the stuff elsewhere.
The decision to tap the nation’s emergency stash (with a matching drawdown by other importing nations) won’t make much of a dent in energy prices over the medium run. But doing something will help Washington pretend that it still matters.
It certainly mattered to the oil traders Thursday. Brent crude, the global benchmark of choice, slumped 6% to $107 a barrel. It had been stuck near $115, amid worries about the lost Libyan supplies, feared disruptions in Nigeria, and disappointing output from the North Sea.
At a stroke, the announcement of the reserves release pushed crude beneath the lows it reached during its “flash crash” in May, and all the way back to where it stood soon after Libya revolted in February.
It wasn’t so much the trivial additional supply. The global release of reserves amounts to maybe 16 hours of planetary crude consumption, while the US half of the total represents about a day and a half of domestic demand.
More likely, oil fell as much as it did because the announcement carried a whiff of desperation, coming on the heels of lousy economic data, downgraded economic forecasts from the Federal Reserve, and budget-cutting talks likely to sap growth further.
The Obama administration insisted for months that no such release was needed because there was no shortage of supplies. Now, with Brent already $10 off its peak and growth cooling, the White House had suddenly reversed course and lurched into action.
Some analysts think the move might actually work as intended over the longer term. For example, the commodity research group at Goldman Sachs is preparing to lower its Brent crude forecast for next year, from $130 to about $124 a barrel.
Now, even Goldman’s liable to get it wrong from time to time. But here’s guessing that, even if that guess proves spot-on, they won’t be bumping fists at the White House.
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A Drop in the Ocean
If the extra crude looked trivial compared to global consumption, they look even less significant relative to crude stockpiles. US crude stockpiles currently total 364 million barrels not counting the SPR.
Across the developed world, some 2.7 billion barrels of crude is in storage, equivalent to 59 days of demand, according to the International Energy Agency. An extra 60 million barrels of the stuff doesn’t seem likely to affect production or consumption much, if any, and would amount to a little more than 2% of developed world stockpiles.
The release was immediately panned by the very industry the government is counting on to take up its offer of additional supply.
The American Petroleum Institute, which resents restrictions on domestic drilling and the push to revoke tax breaks on same, called it “a reactionary move based on failed energy policy by this administration.”
The head of the National Petrochemical and Refining Association, representing an industry under investigation by the Federal Trade Commission because its margins have nearly doubled this year, said “this action today will do nothing to benefit consumers.”
No member of either group will be required to bid when government crude is auctioned off next week—for delivery to the gas pumps, at best, a month later.
There is precedent for a shortfall: after Katrina, the industry bought 11 million of the 30 million barrels the government planned to make available, according to Fuel Fix.
As the World Turns
By early Friday morning, oil prices were already bouncing back 1%, aided by a deal to bail out Greece and the Chinese premier’s declaration of victory over inflation.
However dubious the merits of that claim, China will be burning an awful lot of diesel this summer to offset expected shortages of electricity. Its growing thirst for crude is a major reason global supply isn’t expected to keep up with growth in demand later this year.
That, in turn, will shrink the spare capacity the Saudis are sitting on. And the looming drop in this crucial safety margin is a key driver of the investment demand for crude. An extra 60 million barrels seeping into underground tanks somewhere isn’t going to matter to such investors.
It might matter a bit, however, to the refiners that manage to score high-grade crude at the expected slight discount to the market:
- The two biggest refineries in the region belong to Exxon Mobil (XOM), where a deal like that would barely move the needle.
- The third is a BP (BP) operation still recovering from a damaging power outage.
- The fourth-largest refinery is Marathon’s (MRO) in Garyville, Louisiana.
Marathon’s stock has stayed remarkably strong throughout this market correction, and next week the company will spin off its refining and marketing operations as the Marathon Petroleum Corporation (MPC).
Marathon currently sells for eight times forecast 2011 earnings and 4.4 times trailing cash flow. If MPC drops once shareholders get to sell their shares, that might be a good time to get in.
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