Is The SPR Release Already Priced Into Oil Prices?
As the rumor (and denial) of the potential release of the SPR washed out Crude and Brent prices last week, only to recover within 24 hours, we wonder if this was all the bang for the buck that these kind of pre-announcements will get. With the majority of crude reserves based in the US and product reserves based in Europe and spare capacity falling as OPEC picks up production even as Iran backs off, Morgan Stanley notes that the maximum stocks drawdown of the SPR in month 1 could average 14.4mmb/d (10.4mmb/d of crude and 4.0mmb/d of products) which is enough to mitigate flows passing through the Strait of Hormuz (according to the IEA). However with only 90 days of cover at these rates, it is hardly the 'solution' to even the briefest of geopolitical disruptions. This perhaps explains the price action of previous SPR announcements, which varies by crude benchmark, but holds prices lower for a maximum of two weeks. Most notably, the greatest price drops on the SPR announcement tend to occur in the first 2-3 days (and in the very front months) at which point the term structure starts to increase once again. Louisiana Light tends to be hit the most followed by Brent and then WTI but the rebound is just as aggressive and we wonder if last week's rumor was merely a strawman to see just what impact was possible (we dropped 2-3% or so) and recovered rapidly compared to the 4-5% drop in June during the Arab Spring release (which was the largest release in the last 20 years).
Chart: Morgan Stanley