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As US Prepares To Tap Strategic Oil Reserve, Crude Prices To Surge On Asian Disaster Preparation
With ICE and CME margin hikes - that last bastion of supply/demand imbalance suppression - no longer having an impact on crude price, it was only a matter of time before the last theatrical measure in the price arsenal was used. Per Dow Jones: "White House Chief of Staff Bill Daley said on Sunday the Obama administration is considering tapping into the U.S. strategic oil reserve as one way to help ease soaring oil prices." Speaking on NBC television's "Meet the Press," Daley said: "We are looking at the options. The issue of the reserves is one we are considering. ... All matters have to be on the table." There has been support among Senate Democrats for tapping the reserves. Senator Jay Rockefeller on Thursday became the third Democrat to ask President Barack Obama to tap America's emergency oil supply to cool prices that have risen past $100 a barrel on the strife in Libya." What our esteemed politicians fail to realize that tapping the SPR is analogous to Lehman filing an 8K declaring to the world it is now tapping directly into the Fed's discount window for its liquidity - that didn't end too well. The problem with the SPR is that as a non-marginal replacement of supply it is largely a puppet: with a capacity 726.7 million barrels, the SPR holds a 34 day reserve at the US daily consumption of 21 million barrels. The picture is slightly better when considering that the US only imports 12 MMbd, meaning there is a 58 day supply. But the biggest issue that nobody is considering, is that the maximum total withdrawal capacity is physically limited to just 4.4 million barrels per day. In other words, should the MENA escalation flare up, there is no way to physically replace all the lost output. Yet what is most troubling is that even as the US is about to start using up its reserves, Asia is actively shoring up its oil, meaning that as our own oil buffer gets ever smaller, Asia could easily dictate economic terms over the OPEC cartel as soon as a few months from now if the Bernanke liberation wave does not end any time soon.
More on the last ditch attempt at preventing all out desperation at the oil pump as gas now moves solidly into $4 territory across the country.
In a letter to Obama, Rockefeller said a "limited draw-down" from the nation's 727-million-barrel Strategic Petroleum Reserve "can protect our national security by preventing or reducing the adverse impact of an oil shortage."
On Wednesday, U.S. Energy Secretary Steven Chu ruled out releasing oil from the reserve, saying ramped up oil production in Saudi Arabia should lower the crude price.
"That's going to mitigate the price increase," he told reporters on Wednesday. "We're hoping market forces will take care of this."
Just as market forces took care of Lehman once it became known that the bank was a zombie, solely reliant on the Fed for liquidity. This time the liquidity is of a different sort, but the reaction will be the same: how long before our idiot politicians finally understand how the market operates?
In the meantime, CHina's response is by far the more logical one (from Dow Jones):
China will start work on building strategic oil reserve tanks at the north-eastern port of Tianjin by May, China Daily newspaper reported Saturday.
Work will be completed before the end of China's 2011-2015 five-year economic plan, and filling this reserve will start when the oil price is "appropriate", Tianjin city official He Shushan was quoted as saying.
China's efforts to build up oil stocks are closely watched by energy market analysts, as its demand for oil is a key driver of global prices and huge amounts of crude are needed for the project. China imports more than half the oil it uses.
The reserve site in Tianjin is among eight stockpiling bases being prepared in the second phase of China's strategic petroleum reserve project.
These eight sites will have 26.8 million cubic meters of capacity, able to store the equivalent of 169 million barrels of crude oil.
The western countries' energy watchdog, the International Energy Agency, has repeatedly criticized Beijing for not publishing national oil stock volume figures, which are needed to calculate global oil demand.
Sites for other second-phase bases include Zhanjiang and Huizhou in Guangdong province, Lanzhou in Gansu province, and Jintan and Jinzhou in Liaoning province.
China's petroleum reserve capacity was enough for 39 days of consumption by the end of 2010, with this comprising the SPR oil and a further 168 million barrels of commercial reserve capacity, state energy giant China National Petroleum Corp. said in January.
It is not only China: all of Asia is taking the prudent step of preparing for a very long storm. From the FT:
As oil prices spiral higher amid turmoil in Libya, developing countries across Asia are taking evasive action, shoring up their strategic petroleum reserves against the risk of a prolonged supply shock. Their actions could propel crude even higher.
The Philippines, citing events in the Middle East, announced on Wednesday that it would require oil companies in the country to maintain 15 days of reserves, and refineries to keep enough oil to last for 30 days.
Manila’s move is the most visible sign yet of how Asian countries are seeking to improve their oil security amid what is shaping up to be the worst supply crisis since the invasion of Iraq in 2003. Other big regional oil importers are likely to follow suit.
China is the world’s second-largest oil importer after the US. India is the world’s fifth-largest, ahead of countries such as South Korea, France and the UK. But the pair lack a strategic petroleum reserve that can be tapped during a supply crisis similar in size and scope to the ones held by western countries.
Unlike industrialised countries, which built up their stockpiles three decades ago in the wake of the 1973 oil crisis, China only recently began its strategic reserve programme, starting to fill reserves in 2006 and completing a 102m barrel build-out in “Phase One” two years later.
The second phase of the programme will build a further 168m barrels of reserves by the beginning of next year.
When China finishes filling its reserve, which it is expected to do by 2020, it will hold about 500m barrels, equal to roughly three months of imports and the second-largest stockpile in the world.
China’s strategic stockpiling “is likely to be a feature of the global oil market not only this year but this decade”, says Soozhana Choi, head of Asia commodities research at Deutsche Bank in Singapore.
Although purchases are kept secret, analysts and oil traders believe that events in Libya and the prospect of further supply disruptions in the Middle East could boost strategic buying of crude.
“With the expectation that prices are going to rise, they will accelerate the pace of tank-filling,” says K.F. Yan, director at energy consultants CERA in Beijing.
Here is a brief lesson in FIFO/LIFO: as the US is about to use up a whole lot of low cost-basis oil, the expectation of surging Asian demand for crude will send prices skyrockting even more, forcing the US to use up increasingly more cost prohibitive oil. Of course, all of the oil in the SPR will have to be replaced, as the US then suddenly become a marginal buyer of oil at the next price of $100+/barrel, which will also be factored into expectations, which in turn will send the oil price even higher, and by the time this horrendous attempt at damage control is over, gas at the pump will be well over $5/gallon.
But somehow none of this made Meet the Press...
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Wad'n me.
Leave it to the polititians for short term solutions. They will tap the reserves just as quickly as borrowing from the federal reserve for more money.
I've said it before...combine those two strategies: pay people to not drive. Done.
/sarc
I don’t think even Obama is dumb enough to believe that the tap into the oil reserve is gonna change the outcome of what ever the outcome is gonna be in the camel jockey world. Even all the uneducated and educated Arabs are smarter than that. Now, with his poll ratings being at 50% or so plus, Mericans appear to be that dumb. However, if gas goes sky high and home heating oil gets to the point were it becomes critical next winter for those dependent upon not freezing to death, then Obama can step in too late, and do an emergency mandate for America to ramp up its own fuel assets—coal, nat gas, nuclear, hydro dams, and prohibited oil drilling areas. We have a huge supply of low sulfur coal. We have oil underground and under water that is now off limits. The environmental arguments against new dams to generate electricity and store water should be questioned. Nuclear, as in France, needs to be looked at with the thought of Russian and our own failures.
A continued Obama reduction of the Military and higher fuel costs for reduced usage and more tax $ for government and World instability appears to be the short term plan. Did I mention printing more US dollars and more bonds?
Totally nuts! I guess they really don't understand what is meant by 'strategic'? They think it means....uphold the extend/pretend debacle. When actually it means save for a disaster....what idiots.
There is no crisis so bad that the President and Congress can not make worse by idiotic schemes to fool the public.
you'd think there was no oil around if we are even considering taping the SPR. As has been alluded to earlier, it is a political trick to bring prices down, but doomed to failure as most ideas are from the current group of morons and clowns at the helm of the US Titanic. I submit this is another Obama scheme to make us less reliant on oil...drain the SPR, continue to turn deaf ears and blind eyes to new drilling at the deep water levels and on the continent, and force America to "green" jobs and energy. Or another way toward the destruction of the American economy. More change you can believe in......
Let us not forget the largest consumer of petroleum...The U.S. military!
I want to buy a few call options on Oil futures. Should I buy Brent, WTI? How many months out?
Yes. 2.
Daley is only trying to talk the market down. They won't release a drop of reserves from the SPR to the public.
The SPR is for government use, not the general public. When the government declares martial law after the ponzi economy collapses, the Army will have the only access to petro as it tries to restore some semblance of order in the ensuing chaos.
remember, the SPR is government AND enterprise storage. How much oil is being held by specs? Do you suppose Obama would release oil from the Salt Dome so Specs could put it in storage? Bush transferred authority to release oil directly to his Energy Sec, therefore OObama doesn't have to beg Republicans to start releasing oil. the end game is 2012, if you think gasoline will be $5 and Obama will lose the election then by all means go long crude right now. If you've seen this play before, then consider the other side of the trade. if you really want to know where the economic recovery is, in terms of energy watch Natural Gas. The President might want to consider ways to get that flow moving, just to convince people A) the recovery is for real and B) he is doing something to augment dependence of foreign crude dependency. In the next couple months campaign 2012 will kick off, but right now we're in the let things look bad today so they will look better tomorrow game. Position accordingly
For shits and giggles:
http://mazamascience.com/OilExport/
and select "United Kingdom". Thatcherism when viewed through the prism of oil exports is not the success story that it has been made to be. It did give the Bankers something to loot and pillage though. I feel so sorry for any Brits out there...
Somehow I don't think the situation is critical enough yet to open the SPR, then again it all depends on how panicky things get this coming week.
its not critical enough for TARP or the bailouts, or QE1 and QE2 and not critical enough for the plunge protection team, and certainly not critical enough to buy General Motors, and definitely not critical enough to keep monetizing the debt in order to forestall a threat to block raising the debt ceiling. No nothing is critical enough, not to be considered a matter of policy, rather than an emergency measure.
just wait til they tap the SPR and it trades $118-120 which is where spot crude traded friday March 4 on the gulf coast. The funnier joke will be when they figure out those barrels are headed to Asia or Europe. Our guys in DC are so f'ing stupid. It'd be funny if it wasn't so, so sad.
See those $$ signs in Daleys eyes? Shock. Ex JPM and the backdoor info flows hard now
So, the Saudis are raising prices for Europe and Asia, and we are going to rely on the SPR for the summer?
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