Releasing the U.S. Oil Reserves: Why Now?
In an attempt to stabilize global oil supplies and reduce energy prices in the face of Libya's missing production, the United States is leading an international effort to release 60 million barrels of crude reserves to world markets.
The 28 member states of the International Energy Agency (IEA) decided to release the reserves after weeks of secret negotiations, in the hopes that increased supply will lower prices. The tactic worked immediately: the spot price of Brent crude fell 4.2% to US$108.08 a barrel while the spot price of West Texas Intermediate (WTI) crude was cut 4.6% to close at US$90.65 per barrel.
The total amount of oil to be released - 60 million barrels over 30 days - is relatively trivial, given that the world consumes more than 89 million barrels of oil each day. But the release is still significant, in large part because half will be drawn from America's Strategic Petroleum Reserve, a failsafe pool that presidents can access in the face of oil supply disruptions that threaten the economy and national security. This is only the third time the Strategic Reserve has been tapped since it was established following the 1973-74 Arab oil embargo, with the other two occasions being the 1991 Gulf War and Hurricane Katrina in 2005.
The 60-million-barrel release is also significant relative to the 132 million barrels of production that have been lost since war broke out in Libya.
It sends a strong signal to the Organization of Petroleum Exporting Countries (OPEC) that the world's importers will not just stand by and watch as global economic growth is hamstrung by high oil prices. At a June 8 meeting, OPEC members failed to reach an agreement to increase oil production to make up for supply disruptions. After the meeting, Saudi Arabia and the Persian Gulf states split from other producers and agreed to pump up to 1.5 million more barrels of oil daily until the end of the year, to reduce stress on the global economy.
"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," said U.S. Energy Secretary Steven Chu in a statement. "As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary."
Prices were already falling at American gas pumps as the EIA debated the oil release. The average price of a gallon of regular fuel has fallen to US$3.61, compared with US$3.83 a month ago. A year ago, a gallon of gas cost US$2.74.
The EIA nations involved in the oil release will review its effect after 30 days, to see whether additional releases are warranted.
Energy stocks declined broadly on the news, with most energy indices falling more than 2%. The EIA announcement was not the only bearish news of the day, however; the Labor Department also released news of greater-than-expected unemployment insurance claims, and the Federal Reserve reduced its expectations for economic growth.
The decline in oil and equity prices is to be expected. President Bush's decision to tap the Strategic Petroleum Reserve in 1991 is widely credited with calming an oil market that was working itself into a frenzy. When the Republic of Iraq invaded the State of Kuwait on August 6, 1990, the two nations combined were producing 4.3 million barrels of oil a day. This potential loss, coupled with threats to Saudi Arabian production, pushed oil prices from below US$18 per barrel in July to a peak of US$46 in October, an increase of 155% in just three months.
On January 16, 1991, the same day U.S. and allied forces launched their first attacks against Baghdad, the president announced that the U.S. would begin releasing oil from its Strategic Reserve as part of an international effort to minimize world oil market disruptions. Within three months, the Gulf War was over and the price of oil had settled back down to between $18 and $19 a barrel.
Sure, the current decision prompts the question: Why now? The war in Libya has been raging since the middle of March and, as mentioned, Saudi Arabia and the Persian Gulf states just decided to increase their production rates. High gas prices have taken a big toll on President Obama's popularity, so many are saying the move is more about campaigning than about reducing pain at the pump.
Regardless, it is happening, and for us in the Casey Energy team, it is a reminder that U.S. stockpiles are near all-time high levels. Together, the Strategic Reserve and America's commercial stockpiles currently hold 1.1 billion barrels of crude oil, compared to an average of 900 million barrels since 1982. The nation has a lot of oil on hand in case of an emergency, which should temper major price spikes (even if that logic doesn't always prevail).
The U.S. has released a raft of poor economic data in recent weeks. The potential for European debt and currency crises still looms large. The Arab Spring still has life, supported by continued protests by Syria's courageous population, which means contagion to other Middle Eastern states remains a possibility. Right now, uncertainty is the name of the global oil game.
For investors, that means it is time to stick to the basics. There are deals to be had out there, but if you want to be a speculator and not just a gambler, you have to focus on fundamentally sound companies with near-term growth potential. This is not a time to play around with new technologies, or risky terrains, or unproven management.
The global oil machine is a complex beast, but at its heart is simple supply and demand. This oil release adds supply, and that will push prices down in the short term.
[Marin and his team always have their fingers on the pulse of the energy markets - finding the best profit opportunities ahead of the crowd. One of their current favorites is a small company whose specialty is discovering unconventional oil in the Middle East. OPEC countries are starting to run out of easily extracted oil, but this newcomer could save their collective heads. Read on for more.]
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