This comes to us via my friend J Dwight of Dwight Investment Counsel:
The dramatic and surprise coordinated announcement of the release of some 60 million barrels of oil from reserves in the US and Europe dropped oil prices some $4 yesterday to around $91 per barrel.
This decision was the most political decision made since Roosevelt arbitrarily set the price of gold every morning. There was, there is and there shall be nothing that warranted this decision, except falling poll numbers. Unless there is something truly terrible about to happen geopolitically that we are not aware of. Unless something truly bad does happen, this decision was at best misguided. Otherwise just idiotic.
Crude oil prices dropped in response, but that effect will prove to be a temporary situation. The reserve amounts to 726.6 million barrels (@$65 billion). Some 292 million barrels are ‘sweet’ crude and 434 are ‘sour’ crude (high sulfur). The storage for the SPR (Strategic Petroleum Reverse) is in salt domes in southern Texas and Louisiana.
According to the DOE the average price paid for the crude in question was $29.76/barrel. There will be a ‘windfall’ profit that the government gets when it sells the crude. The DOE says that crude can be withdrawn from the SPR is 4.4 million bpd and it will take 13 days to reach the market.
The context for this decision is overtly political. This is an act of desperation. The presidents poll ratings are plunging. The number one concern for the American people is the lack of job growth and gasoline prices. European politicians are in the same situation and the coordinated release shows that. Though market participants and economists consider this to be a poor and overtly political decision. The ‘public’ will love it though.
One must wonder when they will try the same with gold, by selling some from the 8600 tonne hoard (of the 27,000 tonne global reserve) that the US holds.
The trend long term is toward higher oil prices. Without new drilling policies and new refining capacity, nothing will change that.
So, oil company stocks were and will be effected, short term, but their fundamentals and opportunities remain sound.
Our problem isn’t the price of oil. It is the price of poor political policies.
In other news, weekly jobless claims are showing a spike and persistently above expectations, trend. This is not good. This indicator tends to show economic tops better than economic bottoms, but the trend is not ‘shinny’. Bernanke, in his talk this week admitted two things, their efforts to pump start the economy hasn’t worked as well as expected and that his view of the economy is 2% growth for the second half of the year, break even after inflation.
On commodity prices, it seems that the upward trend is stalled, and they are no longer in sync with each other. Noted commodity specialist, Dennis Gartman believes the trend is not broken, “But first it must steady itself, and secondly so too must we,…that only the pernicious political nature of the Obama Administration has wrought ill.”