Yup, Here It Is: Tapping the SPR -- Chatter -- Volatility in Crude

Updates

September 19, 2012: Oil down to $91. Huge drop in less than a week. Not good for renewables if price of oil drops too far. Saudi saying they wanted oil below $100; rising too fast. Oil inventories much higher than expected. Lots of chatter. Apparently peace broke out in the Mideast.

Original Post

Link here.

Though crude had been picking up steam for weeks, the former Notre Dame football standout says it was Ben Bernanke who "pushed it over the goal line" last week when traders took WTI over $100 a barrel. As is always the case in trading, particularly in commodity pits, big moves are subject to fast, vicious reversals on the road higher. 

What had the bulls edgy yesterday was growing chatter that President Obama may tap the Strategic Petroleum Reserve, a time honored method for flooding the market with supply to drive down prices. While the Obama administration resorted to these means in June of 2011, they say there's no planned announcement coming, but all options are "on the table." 

Kilburg thinks memories of capricious SPR releases from the past coupled with distortions from high frequency trading activities were behind the nearly $5 drop in WTI in the closing minutes of Monday's trading session. He speculates that one headline-trolling HFT program found an SPR headline and flooded the market with bearish contracts.

Possibly. High frequency trading relies on algorithms. It would be easy to do, and very helpful, to load hypothetically-varying ("what-if") volumes of crude oil released from the SPR into the algorithms to see what the market would do. Hypothetically. Unless, accidentally, one of those trials accidentally went live. Just saying.

The good news. If any of these scenarios are accurate, "we" now have an idea of the floor if the SPR is tapped. In my book, a floor of $96 is not all that earth-shattering. There's not a lot of difference between $100 oil and $96 oil.

And Kilburg (go to the link) sees oil going a lot higher -- after the SPR story plays itself out.

On a related, but different note, I think this makes it very problematic for the administration to announce an SPR release this week: a) first, it would questions about yesterday's volatility ("who knew what when?"); and, b) a drop in oil to $96 is not going to change the high price of gasoline at the pump.