Could A Strategic Petroleum Reserve Release Drop Oil?
- Posted by TheArmoTrader
- on February 28th, 2012
We all remember last year around May/June, when oil prices, while off their highs, were still high. Well, as oil (and gas) prices keep climbing up, there is (albeit preliminary) talk about another Strategic Petroleum Reserve (SPR) release again. We had one last year but did it really cause oil prices to drop?
The release fundamentally does not do much to the supply. The US consumes about 20 million barrels a day. Last year, the US released 30 million barrels (while governments worldwide together released about 60 million). Can the fact that a SPR release is looming cause prices to go down? I mean, speculators play both sides of the trade right (despite what some might claim)? Can the release, even as minuscule as it was last year, cause oil prices to drop?
To Answer that question, lets take a look at the charts to see what happened last year.
$CL_F – WTI Crude Oil
On June 23, the US announced the release of the SPR. That was basically the bottom for the next 1.5 months. I specifically remember lots of people mocking the release (which is ridiculous because its so hard to determine the effect) and how Crude prices were unaffected (Crude was down 16% 2 months later). In my opinion, their analysis here was errenoes. The news of the SPR release was easily priced in. They were talking about it for more than a month. Traders knew it was coming.
Its not that the SPR release changed the supply of oil dramatically. Its the fact that the government did something to try and combat oil prices (aka “Speculators”). We know the phrase “Don’t fight the $FED”, but I would also add “Don’t fight the government” either. Who in their right mind would want to be long oil if they knew an SPR release could happen any day. This is where psychology and pricing in comes in. Just like QE2, the fundamentals did not change, but the perception did.
I’m not saying the SPR release worked or that speculators should be fought. I am just pointing out how markets operate (or at least how I see they operate). As you can see, from the high of June to the SPR release, prices dropped about 12% (Gas prices dropped about 11%). Again, I am not saying this is a successful plan (hardly) to combat oil prices, but if you are playing oil, in my opinion, you have to take this into consideration.
(Daily 1 year chart)
Here is the weekly chart of the Ending Stocks of Crude Oil in SPR (via @TheStalwart). As you see, the release in 2011 was just a small blip in the overall picture.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry Khachoyan is currently an undergraduate student at UCLA pursuing a degree in Political Science. He started trading in September of 2008. He concentrates on using technical analysis and reading the tape to enter the best risk/reward trades. The stock market to him is one of the greatest inventions by man.
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