I’m surprised by the move by the President and the IEA. What’s this about?
Is it about the price of oil?
Before the announcement WTI was sitting around 95. That’s a solid $20 lower than it’s peak eight weeks ago. Why would Obama & IEA act today? A very big price adjustment has already been made. If the circumstances were different and the price of WTI was through $120 I might have agreed to this. But why make a splashy show now when no show is required?
There is more to this than meets the eye is my conclusion.
Is this really about Libyan production?
On a global basis I don’t think this sells. Japan’s slowdown offsets most of the Libya loss. Anyway, the Libya story is two months old. Why the action so late in this game?
Is it about punishing speculators?
Obama promised to do this. I thought he delivered on his promise when the CFTC started raising margin requirements willy nilly. But direct intervention in the crude market? That is raising the ante by a great deal of chips.
The driving force in the drop in crude over the past month or so has being the growing realization that the global economy is hitting multiple speed bumps.
Not to be boring, but China, Japan, Europe and the USA are all slowing down. What “specs” out there were swimming against that tide? Not many, in my opinion. So if one of the objectives was to beat on the players I think this move missed by 90 days. IMHO this silliness is setting up a great buying opportunity. So the specs are going to cash in when this washes out.
Is it about teaching a lesson to OPEC?
I am concerned that this is a factor. The US wanted OPEC to up production. That didn’t happen. So the bad boys who produce oil just got a shot across the bow.
Watch if this angle on the story gets “play”. It would piss off those bad boys and they will retaliate. Does O really think he can take on the world oil market? He can’t beat the Taliban. OPEC will crush him.
Is it about stimulating the US economy?
This seems to be a significant part of the equation. But just think this through. The rule is that for every $1 drop in crude we see a 2-cent drop at the pump.
Say for the sake of it that this drama will result in a $10 drop in crude. So the pump goes down by a lousy 20 cents. Do the deep thinkers really believe that if gas gets twenty cents cheaper for a month or two that they have really bought themselves anything? Are things so desperate that steps not taken before are justified? That’s a conclusion the stock market was pondering today. The bond market ran up the same flag.
Is it about stimulating China or Europe?
That can’t possibly be the case. The 60mm brls represents just 16 hours of global consumption. If it’s stretched out over 30 days it comes to an insignificant 2% of daily demand. That is a super tankers worth. There are hundreds of ships at sea right now with that much crude on them. This has nothing to do with influencing global supply.
Is this a desperate move by the administration to show leadership?
I looked at the WH home page and did not see this important development highlighted. Maybe the big O is trying to distance himself on this one. I’m convinced this will backfire. Give it two months. Tops.
Are supply and demand conditions such that this extraordinary move is justified?
Beyond the already discussed Libya non event I’m not aware of something that is blowing up in one of the big producers. Does Obama have some insight on this? Does he know something I don’t about Iraq, Iran, Venezuela or Nigeria? Stay tuned. If something blows in one of these over the next few weeks you will see how things are orchestrated.
Is this a big deal?
On the numbers; no it is not. But it is one of those sharp right hand turns that come up from time to time. Because it is so unusual it bears noting. We live in an interventionist world. Every aspect of the global economy is trying to be manipulated by the “Deciders”. I have never seen a precedent like today. In that sense, I consider this to be a very big deal.
Are we going to see more of this type of market intervention?
I’m sorry to say that we might. What’s been offered up is a drop in the bucket. So round two of this foolishness is a distinct possibility.
This took months to put together. Bernanke knew it was coming. We live in a manipulated world.
My thoughts:
-This was a bonehead move that was put together by Euro technocrats. They dreamt this up two months ago. It was a dumb plan to offset the consequences of Libya. Because 30 countries are involved it took sixty days to ink an agreement.The timing today is a mistake.
-Mr. Khadafy is pissing many folks off at this point. He should be gone by now. Look for Mr. K to get a cruise missile up his arse any day now.
The principal rationale for this market intervention is Libya. Take that out of the equation and there is no justification left for continued meddling in global markets.
-This one trick pony is going to knock 15 cents off the price of gas for a month or so. There will be a disruption in market liquidity and inventory levels. This will result in a big spike in crude sometime this fall.
-OPEC will respond. “We” will pay a price for this.
-There will be technical problems at the SPR. They will not be able to deliver 1mm barrels a day of light sweet crude.
-Obama will get some egg on his face with this one.
Posts
Whatever the original rationale, it could be just the routine crummy timing, ineptitude and ham-handed clusterfuck in which governments specialize.
ReplyDeleteAnd THIS deluded administration, even more so than any in the recent past, seems to truly believe that governments CAN not only just influence, but CONTROL markets.
So...get ready for unforeseen consequences, additional market disruption coupled with speculative opportunity (right now!) and, in the end, even LESS confidence...
This may be a case where the econ guys are over analyzing. My bet is that this is simply a purely domestic political play.
ReplyDeletePanic has set in at 1600. Axelrod, Plouffe and the re-elect team are seeing internals that are so bad as to be frightening. For starters, the blue states will lose at least 12 electoral votes as a result of the census, making the re-elect challenge that much harder. Fluky states like Virginia, Ohio and Florida that went for Obama in 2008 are not likely to repeat. When Obama speaks about how he and his family would be content to serve just one term, its a clear signal that he too has seen the handwriting (or graffitti) on the wall.
Each week's bad news is "unexpected". The administration speaks of the fragile "recovery". Workers are idle, gas has doubled, food prices are up 30% in the past year. Out here in the heartland, no one believes things are "moving in the right direction". The voters know better. Barring a miracle or a comatose Republican campaign (always a possability), this Presidency is over.
Here's the panic play. Yesterday the President announced a troop drawdown in Afghanistan that pleased no one. The left sees it as too little, the right views it as a precipitous retreat from a mission where we've already invested considerable blood and treasure. When General Petraeus was asked today why September 2012 was chosen as the target date for the completion of the drawdown (just halfway through the “fighting season”), he answered that it wasn’t military conditions, but “risks having to do with other considerations” that led to the administration’s decision. Huh.
Today, the administration announces this inappropriate raid on the oil reserves, just in time to provide relief for summer travelers. Clearly, this is not a fix, but merely a sop for the ever more frustrated electorate. The next year will be grim for Team Obama, and I would suggest that the motivation for today's action is no more complicated than a transparent attempt to outrun the elctoral reaper.
I think Chance has it right.
ReplyDeleteSomebody told the Admin that the peasantry was murmuring about gas prices.
Same as they were told the former Obama-supporters were murmuring about Afghanistan (I'm still loving that line about bringing the nation building home: looks like we're in for massive fraud, waste, corruption plus no rule of law--just like in Afghanistan).
So now we get a pointless release of oil. We also get an announcement of troop withdrawals.
Probably we'll get something on gay marriage soon.
Yawn. Kick the can, don't solve problems, just work on getting re-elected.
Jim,MtnViewCA,USA
Am I wrong? I thought that the oil in the SPR was all sour, not sweet crude.
ReplyDeleteThis is one of those moves that will dampen prices in the short run, while leaving things worse in the intermediate term, like most currency interventions.
Dear Folks:
ReplyDeleteMany good thoughts posted.
But OB and his 'powers that be' may be doing an ex post facto move (after the big drop already occurred due to less manipulated market forces) to ride its coattails and claim potency from the jaws of impotency. Ask the folks at GS and see how long ago they planned this BS. More GS-BS!
well if you really want to know what is going on the elites want to screw opec and produce sweet light crude in the US, (look in alaska just made the largest oil rig in history called the liberty)default on the us debt and bomb outside oil production to disrupt china and russia....c'mon now deeper down the rabbit hole we go!
ReplyDeleteAnother data point to show this was a political move. It seems like a sign of desperation this early in the campaign. Maybe no one told them that Main St was suffering until lately? Jim,MtnViewCA,USA
ReplyDeletehttp://washingtonexaminer.com/blogs/beltway-confidential/2011/06/remember-flap-over-foreign-ships-and-deepwater-horizon-cleanup
Soon after the Deepwater Horizon disaster began, with raw crude pumping out of the seabed into the Gulf of Mexico in the worst oil spill in American history, foreign nations began offering help with the clean up.
Especially notable was the Belgian firm DEME, which specializes in ocean-going clean-up work and which offered to bring the best equipment in the world for the operation to the Gulf.
But it didn't happen because President Obama refused to waive the Jones Act, a protectionist law sought by the maritime unions to keep foreign-crewed vessels out of U.S. waters.
The Jones Act has a national-emergency provision that allows the president to waive its requirement of American crews, as President George W. Bush did during the Hurricane Katrina disaster that nearly destroyed New Orleans.
But Obama resolutely refused last year to waive the Jones Act in order to allow the DEME and other equipment offered by foreign nations to be brought to the Deepwater Horizon cleanup. An operation that could have been completed in four months instead stretched into nearly a year.
But this week we have learned that under certain well-defined conditions Obama is more than willing to set aside his reservations about waiving the Jones Act. And those conditions have mainly to do with the fact Obama wants to be re-elected in 2012.
Among the biggest obstacles to Obama's re-election effort is the prospect that gas will still be around $4 a gallon next year. So what does Obama do? Not only does he authorize using 30 million barrels of oil from the U.S. Strategic Petroleum Reserve, he waives the Jones Act to allow foreign crewed ships to deliver the SPR oil to U.S. ports.
The rationale for QE2 was too low inflation and too high unemployment. Employment gains are not happening in the way Bernanke expected. But inflation has risen and everyone's noticed. Bernanke wants QE3, but elevated inflation expectations are a block.
ReplyDeleteThe Fed needs to see lower inflation prints and lowered expectations, so wants the commodity complex to come right off in the near term, providing them the cover to restart their QE doomsday machine.
That's the best explanation for this intervention, in my view.
I saw gas prices drop from 4.15 to 3.45 in just
ReplyDelete3-4 weeks. yesterday I paid 3.43 for gas, I thought it was my birthday. I'm amazed that Obama releases 60 million brls when gas is at a low. Why didn't this idiot do something like this when gas was over 4 dollars. I hope people don't begin to think he was doing it for the poor people at he pump. The SOB was doing it purely for political gain trying to win a few votes or did we forget there is an election year coming up.
Overall a great post. Strikes me as pretty obvious that they are looking for some relief at the pump. Maybe they got good advice that real money is on the brink of bailing out of energy and decided to give them a shove?
ReplyDeleteBruce, you are better than the "this is only 2% of supply for the next month" argument. The price of oil has proven to be very elastic to small changes in supply and demand. The price action just proved that. End of story.
Also, "OPEC will crush him"? Really? They're an inherently unstable cartel. Saudi Arabia was already priming the pumps to the tune of 700K bbls/day, in defiance of OPEC. Too many unstable regimes too reliant on oil revenues to really squeeze the market.
Wellred:
ReplyDeleteHello. You mention price action.
The CFTC announced this afternoon that they were investigating leaks on this. You know prices so look at the tape. Crude took a dump 1 1/2 hrs before the announcement. What does that mean to you?
To me it means that the street/ST players got loaded up by some sharpies. So when the news hit they puked and crude was down 5 on the day.
This is intervention. A botched attempt at shock and awe. I'm not impressed. We shall see. Give it two weeks to measure that "price action".
On OPEC? We shall see.
I watch LLS. That is the raw material for gas. It closed at 105. Any cheaper and they will shift tankers to Europe.
I say this is a bluff.
Link to LLS pricing:
http://www.bloomberg.com/apps/quote?ticker=USCRLLSS:IND&n=y
why is it market manipulation for speculators,but not when barry prints money or releases oil to the over supplied markets...
ReplyDeleteI go more for the beaurocratic fumbling and bumbling myself. Unless it was thought that the trend downward already in place could be triggered into a cascade. Oil import costs to the US could be reduced further, thus stimulating the economy, which is in dire need of such.
ReplyDeleteGood article. It seems that Obama and his cohorts can never be faulted for overestimating the intelligence of ordinary citizens, and voters. Voters can probably add and subtract better than they can, so will quickly see the reality here.
ReplyDeleteMy experience in markets that are almost commodity like is that a spike in supply will result in a disproportionate price reduction for a very short time. Politicians will be able to thump their chests and claim some sort of victory, but it will be short lived due a rapid return to reality. Whatever reality will be based on real supply and demand.
They will feel similar in a way to the famous feeling you get from peeing your pants. Momentary relief until the reality of wet, smelly pants sets in.
thanks for posting such a nice information
ReplyDeleteplease keep posting such information
thanks for posting such a nice information
ReplyDeleteplease keep posting such information
You guys are really great! It is like the story in the news. The 2012 election is the Amtrak train traveling through Nevada. The cement truck is going full speed ahead about to crash into the train, and you guys are saying: “Turn! Turn! Don’t go there!” The Nevada train accident happens again in 2012, because Obama ain’t listening.
ReplyDelete(Bruce, I would like a separate glossary for the acronyms(?) I couldn’t tell if “O” stood for oil, or Oh, but that it meant Obama. Thx=Thanks.)
manipulation, surely. short term effect, we shall see. but like any addiction, going to the substance, in this case the reserve, is only a symptom of the problem which is the inability for our government to sit tight, and not always react out of fear.
ReplyDeleteBruce,
ReplyDeleteMy understanding is that you see two consequences of this move: (1) There will be a transitory reduction in the price of oil/gas(2) whether or not the price action is temporary, OPEC is going to punish Obama, I would imagine by cutting supply, resulting leading to sustained oil/gas higher prices.
Is this interpretation correct?
First, I would be surprised if in the case that the price movements are short-lived, OPEC responds. In such a situation, Obama's (or is it the Eurocrats'?) complete irrelevance to market outcomes has been laid bare. Why would it be necessary to compound Obama's embarassment, given the risks involved (I will get to this).
Now let's assume that the price impact is more permanent. In this case, it is up to OPEC to teach Obama a lesson. Unless I am missing something, cutting output is their only recourse, a move which would push up prices, not only due to the supply/demand dynamic but also as the result of an inflated the risk premium. So what kind of a net price impact are we talking here? Brent at $130-$140, with WTI trading maybe around $110-$120?
Compounding the accelerating double-dip in housing, the expectation of very meaningful withdrawal of fiscal stimulus, and an already shaky economic recovery with skyrocketing gas prices (with no QE3 on the horizon), all of a suddent leads to a meaningful risk of pushing the US back into a recession. What would the lasting impact on prices realized on oil sales by OPEC then? Let's leave alone the very real prospect of a hard landing in China.
Bottom line, Obama and OPEC are jousting on very thin ice. For OPEC to do something drastic in response to this move would strike me as very foolhardy given the current economic climate. Given the (unfortunately lengthy post) above, I anticipate a lot of rhetoric, but no substantive policy.
Off-topic: someone posted this link to a spread sheet of budget numbers for a "$30 trillion" deficit.
ReplyDeleteThis is Social Security, right?
I am not too familiar with OASI, DI, HI and so on.
http://www.ssa.gov/oact/TR/2011/VI_F3_OASDHI_dollars.html#176345
Wellred,
ReplyDeleteI wish I had a lock on the future. If I did I surely wouldn't be writing a blog. I'd be coining money. But I am writing this and I'm not get rich in these markets.
But I do my best to look around the corner and see what may be coming. In this case I do see the benefits as transitory. And I do see prices higher by the end of the year.
You talk about QE and that it is ending. Read some of my stuff on this and you would understand that I think that QE was a dud. So the absence of POMO does not seem significant to me.
But I see ZIRP as an extremely powerful force. This will be with us for a long time to come.
To me, ZIRP=Inflation. How could it not? This is the policy that Bernanke is following. I hate Ben for what he is doing, but I would not fight him either. The prices of "stuff" (including energy) is going up.
Grace: Sorry. In this case "O" was Obama.
ReplyDeleteAnon at 5:18
ReplyDeleteThe link you provided is to SSA, not me. I write about SSA often, but this is not my link??
I'M NOT VERY OPTIMISTIC ABOUT OUR FUTURE. WE ARE BEEN GOVERNED BY A BUNCH OF IDIOTS THAT ONLY CARE ABOUT BEING RE-ELECTED. OBAMA HAS PROVEN TO BE ONE OF THE WORST PRESIDENTS EVER. IT'S NOT HIS FAULT. THE REPUBLICANS GAVE US A FORMER PRISONER OF WAR THAT WAS A PATRIOT BUT TOO DAMN OLD.
ReplyDeleteIF WE CONTINUE ON THIS PATH WE WILL BE RUINED AND WE WILL DESERVE EVERY CALAMITY THAT BEFALLS US.
I think the best explanation is that this is an attempt to get a temporary reduction in the inflation rate in order to build the case for QE3.
ReplyDeleteTwo separate Social Security trust funds are used to pay cash benefits to workers and their families. Benefits for retired workers and their families and for survivors of deceased workers are paid by the Old-Age and Survivors Insurance (OASI) Trust Fund, and benefits for disabled workers and their families are paid by the Disability Insurance (DI) Trust Fund. These two parts of the Social Security program-OASI and DI-are collectively referred to as OASDI.
ReplyDeleteWellRed,
ReplyDeleteJust in case you didn't know, crude oils prices are centred in the futures mkts and - on global/regional scale - have not much to do with physical supply/demand. Certainly though, OPEC actions can have effect, simply not in so direct a manner as pre-1986 [or more importantly, post-2000, the CFMA and progressively larger index fund influence.
2. It might take more than a moment but I think you would find the initial founders of InterContinental Exchange [ICE] to be an interesting group of very large financial and energy companies.
@ Anon 4:02
ReplyDeleteThanks for the heads-up on oil prices - yes I am aware that long-term contracts are priced off of futures rather than spot markets. I am also aware of the progressively larger influence that large insitutional investors (many of whom are long-only) are having on prices: generally pushing them upward. However, even taking those considerations into account, I am reluctant to believe that supply/demand (or expectations thereof) are not a (the most?) significant factor determining market-clearing prices. That being said, I do enjoy a well-evidenced argument.
As for ICE, while I have a vague understanding of its origin, I am not sure I understand the connection.
Did Soros make money on the price swing caused by the release?
ReplyDeleteWhat speculators were informed before the public announcement?
Follow the money!!!!!!!!!!!!
First time reader ...
ReplyDeletei particularly appreciated the thought process / articulation of,
"Chances You Take" and signed, "Jim,MtnView,Ca"
and thank you Mr Krasting.
i will certainly look for your work.
your way of presenting, asking,
... was it for this? could be ... xyz
... what about that? probably not ... because xyz
that's a lot of years of Wall Street speaking.
and a lot of ... gee! this tastes like crap ... humph ?! it probably is.
put it all together and your conversation
is very dear.
thank you.
bill,phx,az