Author Topic: Surprise Oil Release: Stroke of Genius or Terrible Mistake?  (Read 399 times)

blacken700

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On Thursday, traders on the floor were divided over what the sudden and unexpected release of 60 million barrels from the strategic petroleum reserves of 28 nations signaled for the days ahead.

Terrible Mistake?

Some pros were irate and seriously concerned that recent actions were a dangerous sign that Western leaders truly don’t understand how the economy works.

Both the Dow [.DJIA  12050.00    -59.67  (-0.49%)   ] and S&P [.SPX  1283.50    -3.64  (-0.28%)   ] sold off sharply, as pros fled equities fearing that the desire among world politicians to bring down prices at the pump would drive them to makes disastrous decisions.

The US and Europe provided 80% of the total release at a time when oil prices were already on the decline.

The move immediately triggered wide ripples across the entire market; as the price of crude [CLCV1  91.75    -3.66  (-3.84%)   ] declined, investors dumped energy shares [XLE  72.30    -0.80  (-1.09%)   ], and they also rotated out of higher risk sectors such as materials [XLB  37.71    -0.035  (-0.09%)   ] and industrials [XLI  36.04    -0.08  (-0.22%)   ] .


S&P 500 Index(.SPX)
1283.50     -3.64  (-0.28%%)
INDEX
 
 
 

”It demonstrates a complete lack of understanding of how the economy and of how the markets work,” says outraged Fast trader Brian Kelly. “All it did was create panic.”

And panic is the last thing the markets or the economies of the world need right now, according to trader Guy Adami. He thinks the resulting jitters all but guarantee the S&P tests 1257 – which is flat year on year. “And if we close below 1249, technically we set up for a significant move to the downside.”

With the market trending lower already, Adami thinks this could be the catalyst the ultimately breaks the bulls.



Trader Patty Edwards is also confounded by the move. Although advocates would argue that lower prices at the pump will stimulate the economy and would therefore be good for retail [XRT  52.65    0.72  (+1.39%)   ] – she argues that the marginal rollback will not be enough to offset the broader damage the move generates. “And the White House has signaled this may not be the last release,” she adds.

Stroke of Genius?

OptionMonster Jon Najarian sees the situation very differently. In fact, he suggests the oil release was a stroke of genius. Najarian thinks the Western world just skewered speculators that were artificially driving oil higher – and that’s a positive no matter how you slice it.

Speculators had been accumulating positions for a variety of reasons that had nothing to do with the supply and demand dynamic, he explains. But after the IEA's release, for the speculators "now it’s like dealing with a crazy man. They’ll stop doing it and crude will again start trading on demand,” he says.

Oil trader Dan Dicker agrees with Doc J, entirely. “This is a stake in the Dracula heart of speculators,” he says. In other words the IEA’s move was intended to break the psyche of the speculators. Now they will fear that “when nations can slap the price down – they’ll do it.”

If you're looking for a trade, Dicker thinks the move also highlights how important oil is becoming to the economies of the world. On the pullback he recommends long positions in drillers such as Weath


http://www.cnbc.com/id/43511000

Soul Crusher

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Re: Surprise Oil Release: Stroke of Genius or Terrible Mistake?
« Reply #1 on: June 23, 2011, 01:34:52 PM »
Flip flop. 

blacken700

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Re: Surprise Oil Release: Stroke of Genius or Terrible Mistake?
« Reply #2 on: June 23, 2011, 01:36:51 PM »
Flip flop. 

if it gets the speculators out of the market i'm all for it

Soul Crusher

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Re: Surprise Oil Release: Stroke of Genius or Terrible Mistake?
« Reply #3 on: June 23, 2011, 01:39:24 PM »
Obama was against it before he was for it.

blacken700

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Re: Surprise Oil Release: Stroke of Genius or Terrible Mistake?
« Reply #4 on: June 23, 2011, 01:43:50 PM »
 John Kemp is a Reuters market analyst. The views expressed are his own --

(Adds context, refiles to raise first reference to U.S. code into paragraph 14)

By John Kemp

LONDON, June 23 (Reuters) - The International Energy Agency's (IEA) decision to release 60 million barrels of crude oil from strategic reserves is intended to drive speculators out of the market and resist the formation of a bubble by breaking expectations about near-term supply shortages, rather than target OPEC.

While the intervention will be intensely controversial, especially in the industry and among hedge funds and others running long positions in crude futures and options, it can be presented as a relatively limited move in response to fears about a shortage of specific grades of crude over a short time window, smoothing the process of adjustment.

It is specifically designed to counter fears about a short-term supply-demand imbalance for light sweet crude oils over the peak refining period. These worries have kept Brent futures <0#LCO:> in a steep backwardation and policymakers fear they may be contributing to the emergence of a bubble that imperils recovering economies across North America and Europe.

While the IEA's decision is limited and sensible, it does signal the agency, prodded by the Obama administration, will take a more active approach to managing the market than before, and introduces a new dynamic and source of uncertainty into oil prices.


VOLTE FACE?

This is only the third time in its history the agency has called on member countries to make a coordinated release.

The IEA has traditionally opposed using stocks to blunt price rises. "To use the reserves for price management is dangerous and would fail ... a policy of releasing oil to counteract high prices would add an additional source for speculation," IEA Director for Energy Markets and Security Didier Houssin told the U.S. Senate in May 2009.

If the IEA had ordered the release of stocks in response to soaring prices in 2004 "the market [might have] worried that the stock draw was reducing our strategic reserves and providing a negative incentive to invest in new supplies or improve efficiency, making the fundamental supply/demand situation even worse," according to Houssin (here).

IEA and industry objections to using the SPR to mitigate purely economic disruptions or manage price rises seem to break down into several categories:

(a) Strategic stocks will be quickly exhausted if they are released to meet a fundamental supply-demand imbalance (such as excess demand growth) rather than a temporary disruption (a hurricane-related shortfall or closure of the Strait of Hormuz).

(b) Releasing stocks blunts price signals and delays adjustments needed to bring supply and demand back into balance.

(c) Deploying stocks in response to rising prices would politicise the reserves as governments and interest groups lobbied for releases to mitigate the impact on voters, businesses and consumers.

The U.S. government position has been no clearer. The Energy Department has described the SPR as the "first line of defence against disruption in critical petroleum supplies", a deterrent to hostile cut off of oil imports and providing economic security. But the department has been cool to the idea of releases in response to purely economic concerns or acting as a price regulator (here).


RESERVES PURPOSE

In fact, there has always been confusion around the purpose of the reserves. The 1975 Energy Policy and Conservation Act (EPCA) which established the U.S. Strategic Petroleum Reserve (SPR) sets out various conditions for releasing crude that are a complicated mix of military, strategic and physical on the one hand and economic on the other [ID:nLDE726163].

Crude may only be released and sold following a presidential finding that "drawdown and sale are required by a severe energy supply interruption or by the obligations of the United States under the international energy program" [IEA mandated stock releases] (42 USC 77 Section 6241 (d)(1)).

The presidential determination must include three findings: "(A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (B) a severe increase in the price of petroleum products has resulted from such emergency situation; and (C) such price increase is likely to cause a major adverse impact on the national economy" (Section 6241 (d)(2)).

Smaller releases up to a maximum of 30 million barrels in total spread over no more than 60 days can be authorised to meet the adverse impact of smaller-scale disruptions including domestic shortages (Section 6241 (h)).

EPCA states the SPR is intended to "reduce the impact of severe energy supply interruptions" (Section 6201) but that can be interpreted to cover a range of situations.

At one end of the spectrum are severe physical disruptions (owing to war, revolution, embargo, or natural disaster) which leave sufficient oil supplies unavailable at any price, and harm the ability to project military force or lead to severe domestic rationing and widespread disruption to the economy. Release in such circumstances is uncontroversial.

At the other end are minor physical disruptions or imbalances between supply, demand and inventories that do not threaten physical availability, but push up prices substantially and threaten significant economic harm. Release in such circumstances is fiercely contested. Opponents argue intervention is a mistake and the government should rely on price increases to ration demand and incentivise more supply.

The chaos in Libya and the resulting shortage of light sweet crudes sits somewhere in the middle of the spectrum between physical shortages and a pure price spike. Some production has been lost. There is no risk of the United States running out of oil but the loss of Libyan output satisfies the first release condition. There clearly has been a severe increase in prices (satisfying condition 2). Higher prices could pose a danger to the recovering economy (condition 3).

So the situation in Libyan and prospective shortfalls in crude oil availability over the summer months are squarely within the sort of situations in which the IEA and the U.S. government should consider releasing crude. But that still does not explain why the IEA, under pressure from the United States, has chosen to act this time when it was so reluctant previously.


PHILOSOPHICAL SHIFT

The suspicion is that the decision to order the release reflects a change of personnel and philosophy -- particularly at the White House. President George W Bush and his energy advisers took a strongly pro-market orientation and were content to allow price rises to force demand rationing and rebalance the market. President Barack Obama appears much more inclined to intervene.

The president has already made clear he believes speculators are to blame for exacerbating the recent price rise. Policymakers have noted the record long positions in crude futures and options built up by hedge funds and other speculators, according to data published by the U.S. Commodity Futures Trading Commission.

Gyrations in oil prices (such as the sudden drop on May 5 and equally rapid recovery) have not helped the cause of those who insist prices are driven by fundamentals.

Across the federal government, and in other capitals, there has been a marked loss of faith in the ability of markets to price assets correctly in the aftermath of the 2008 financial crisis, and a new willingness to intervene - for example the Federal Reserve's quantitative easing programme. Intervention that was once unthinkable now has more supporters.

The IEA was careful to welcome the decision by Saudi Arabia and its allies to increase production. This is intended to complement that output increase, bridging any near term shortfall by releasing stocks until the extra Saudi oil reaches consumer markets.

The decision to release light sweet crudes is meant to alleviate shortages in that very specific part of the market, which have been made worse by the gradually declining liquidity in the Brent benchmark and the forthcoming summer maintenance season, and resulted in untypical tightness in the Brent market, reflected by a steep and persistent backwardation.

It is meant to get the market over the high-demand summer period, avoiding a further draw in commercial inventories that would otherwise risk triggering a fresh round of speculation about shortages and renewed upward pressure on prices. (Editing by Anthony Barker)

http://www.reuters.com/article/2011/06/23/column-iea-oil-release-idUSLDE75M1H020110623

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Re: Surprise Oil Release: Stroke of Genius or Terrible Mistake?
« Reply #5 on: June 23, 2011, 01:46:42 PM »
I thought supply and demand was not the issue? 

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Re: Surprise Oil Release: Stroke of Genius or Terrible Mistake?
« Reply #6 on: June 23, 2011, 04:07:00 PM »
Why would 60 million barrels get the speculators out of the market? That's a drop in the bucket and they'll be right back at it in a few days.

Shitty political move that even Dems are questioning. Why now and not when the supplies from Libya were cut off months ago?






Nothing more than an Obama regime attempt to save a sinking ship. These clueless morons are reduced to throwing shit at a wall and seeing if it sticks and fixes the economy.