Obama's desperate SPR oil play

@CNNMoney June 24, 2011: 2:15 PM ET
The market is expected to face a shortfall in the second-half of the year and the president's move may prod OPEC into action, curb speculation and stimulate the economy. Or it may not.

The market is expected to face a shortfall in the second-half of the year and the president's move may prod OPEC into action, curb speculation and stimulate the economy. Or it may not.

NEW YORK (CNNMoney) -- Four reasons are emerging for President Obama's surprise decision Thursday to release 30 million barrels of oil from the nation's strategic reserve -- economic stimulus; a looming supply shortage; a wake up call to OPEC; and a warning shot to speculators in the oil market.

The move was done in conjunction with other developed nations and will ultimately put 60 million barrels of fuel on the market over the next 30 days. Whether it will achieve any of the desired effects is anyone's guess.

Oil prices sank over 4% Thursday, but as of Friday were down just slightly at $90.61 a barrel.

Economic stimulus: Many analysts are referring to the release as QE3 -- a reference to moves taken by the Federal Reserve over the last several months to bolster the economy, known as quantitative easing.

The fed has done two rounds of quantitative easing and was considering a third, although politically that has become more difficult. The decision to flood the market with oil in an apparent attempt to lower prices is seen as a backdoor way to stimulate the economy.

"The impact of relatively high gasoline prices -- despite the recent pullback -- represents a big drag on consumer spending, particularly in the US," Greg Priddy, a global energy analyst at the the political risk consultancy Eurasia Group wrote in a research note Thursday. "The reasoning behind the decision represents the use of strategic oil reserves as a means of macroeconomic stimulus."

But economists were split on whether the release is large enough to lower oil prices enough to stimulate the economy.

Supply shortfall: Of course, the White House didn't come right out and say the release was designed to stimulate the economy.

The administration explained the release as an attempt to make up for the 2 million or so barrels a day that's been lost due to fighting in Libya.

The world, the administration argued, was facing a shortage.

That's only partly true.

The SPR explained

The loss of Libya's oil, a highly prized light crude that's easier to convert into gasoline, is certainly a problem for the oil markets. But up until now that loss had been covered, partly by crude from Saudi Arabia and partly by tapping into reserves maintained by oil companies.

Oil prices in the U.S. had actually fallen some 15% from highs reached in April as the global economic recovery slowed.

But the real shortage lies ahead.

Thanks to rising demand in Asia and the Middle East, the government's Energy Information Agency is predicting that in the second half of this year the world will use at least a million barrels a day more than it produces.

The reason is threefold: China is using more oil to generate electricity as coal prices rise. Japan is using more oil to generate electricity as a significant chunk of its nuclear fleet remains offline. And the Middle East, which uses oil to generate a big part of its power, is quickly discovering the benefits of air conditioning, according to EIA.

The loss of Libya's oil compounded this problem, but it was widely thought that OPEC would step in and make up the difference with part of its 4-million-barrel-day extra production capacity that's currently going untapped.

Earlier this month the cartel made clear that wasn't going to happen, with at least six of its twelve members voting against a production increase.

"We expected a significant drop in inventories and prices to rise," during the second half of this year, said EIA economist Tancred Lidderdale.

Enter Thursday's release from the Strategic Petroleum Reserve.

Lidderdale said it's too soon to know its impact on oil supplies and prices, but the SPR release will have some type of impact which will likely last for several months.

"It's an unexpected shot in the arm," said Lidderdale. 'It should contribute to lower prices."

Warning to OPEC: Some analysts saw the move as a warning shot to OPEC: A "get it together and do your job or we'll do it for you," type of message.

"Today's action may have also bolstered Saudi negotiating power by showing that OPEC inaction has consequences," Kevin Book, Managing Director, Research, ClearView Energy Partners, wrote in a research note.

Saudi Arabia was one of the OPEC members strongly pushing for a production increase, and will likely continue that push in the months ahead.

But other analysts saw Obama's move as an attempt to actually fill OPEC's shoes, a move they say is ultimately futile.

Thursday's 60-million-barrel announcement will cover lost production from Libya for just 30 days. All the industrial countries together have just 1.6 billion barrels in their strategic reserves.

"Using strategic stocks to cap oil prices now that OPEC's ability to do so is eroding isn't sustainable," said Robert McNally of the Rapidan Group, an energy consultancy. "We simply don't have enough in our storage stocks to meet that shortfall year after year."

Wake-up call to Wall Street: Book also suggested the move was an attempt to scare Wall Street speculators, who have been blamed for driving up prices.

The theory is that investors will think twice about making long bets that oil prices will rise if there's a real threat the government will step in at any point and flood the market.

That theory is certainly desired by some.

"I hope it helps deflate speculative froth in the markets and further settles prices back to levels where most experts believe they should be," Senate Energy Committee Chairman Jeff Bingaman said in a release reacting to the news.

It certainly worked Thursday -- oil prices ended the day down over 4%.

Where prices will be in a few months time when all that oil finally works its way through the system -- or where they'll be next week for that matter -- is still an open question.  To top of page

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