Updates
Later, 7:00 p.m. C.T.: wow, wow, wow -- less than an hour after posting the note below someone weighed in over on twitter saying the same thing -- but in a lot fewer words. Releasing oil from the SPR is .... bullish for oil. Link here.
Original Post
I'll assume everyone understands this graph: "total liquids" includes SPR + commercial (non-SPR).
Traders in "oil" look at many, many data points. This is just one of many data points they look at.
However all things being equal, as the number of "days remaining" the price of oil would increase. Again, all things being equal, as the number of "days remaining” decreases the price of oil would increase.
If the White House releases more oil from the SPR the number of "days remaining" will further decrease, all things being equal.
All things being equal, if more oil from the SPR is released, the number of "days remaining" will decrease.
All things being equal, the price of oil would/should/could rise after an SPR release.
End of discussion.
But, actually, there's more: there's a psychological issue involved. Computers won't pick up on it but human traders will. Some human traders will argue that, historically, a release of oil from the SPR occurs when the president understands there is a shortage of oil reaching the market -- such as an embargo, or a break of hostilities in the Mideast -- so, some traders will wonder if oil from the SPR is being released because the president "knows" something the rest of us don't know. By law, release of oil from the SPR is not to be done to manipulate the price of gasoline. [There is a way for President Biden to justify a release even if there is no "real" shortage.]
Finally, oil, like all commodities, is fungible. Once released onto the open market it can end up anywhere. XOM, for example, can take the SPR-oil and transfer a like amount of oil to Rotterdam, and pay back the SPR with less expensive oil down the road.
Having said all that, how much SPR oil is actually going to be released?
If you recall, with the first release not too long ago, on the day the announcement was made, the SecEnergy was asked how much oil was being released; and what was daily demand for oil. She did not answer. Either she did not know or the room would have filled with laughter when 50 million bbls represented one-half day of global demand.
It's because 50 million bbls over 50 days is one million bbls/day. In round numbers:
- US oil demand: 20 million bopd
- global demand: 100 million bopd
- Oil is a globally-traded commodity.
One million bbls/day from the SPR has absolutely zero effect on global demand of 100 million bopd. It might have some effect on US oil demand, but not much.
That brings us to the next problem. US refiners are operating at 88% of their operable capacity. So supply them with more oil and it's unlikely they will produce more gasoline.
That brings us back to gasoline demand and crude oil supply measured in days.
Gasoline demand has slumped considerably for the past four weeks; this past week was the first week in four or five weeks that oil demand has actually increased after a significant decline.
The amount of oil in storage, measure in days, has also been increasing.
Releasing oil from the SPR, now, is a political stunt. Whatever the price of oil is one month after the SPR release, that price will have nothing to do with a release.
The reason it's a stunt is because it's a one time shot, not sustainable. If you add 1 MM bopd sustained, to the market, it will have a decent impact (if OPEC doesn't compensate by cutting more).
ReplyDeleteThis is because oil demand is relatively "inelastic". So a small excess or deficit moves the price a lot. You have to move price enough so that more demand comes on line. But since demand is relatively inelastic, it take large movements of price to get the demand to adjust.
https://www.investopedia.com/ask/answers/040915/how-does-law-supply-and-demand-affect-oil-industry.asp
The same thing happens for sustained withdrawal of supply in reverse. It's what explains why price gyrates so easily.
But the issue is you need sustained production, not a one time shot. For this reason, a Keystone change would affect the market (even years before the oil arrives), just knowing it is coming.
Completely wrong. There is more than enough crude oil. I fell into that same trap also, blaming the high price of gasoline on the high price of crude. Completely wrong.
DeleteSee this post: https://themilliondollarway.blogspot.com/2022/02/no-runs-no-hits-no-errors-february-10.html.
I will continue to give bad marks to the president for canceling the Keystone XL, but a) that train has left the station; and, b) it would have absolutely no effect on price of gasoline.
Crude oil and gasoline, both adjusted for inflation, are still below where they would/could/should be.